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Form F. R. 131
BOARD DF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date ^ 26, 1941
To______ Files_______________
Subject:___________________
From_____Mr- Coe______________
________________________
A fter correspondence with Mrs. Hamlin (see le t t e r s of May 25
and June 4 » 1941 ) the items attached hereto and l i s t e d below, because
of th e ir possible con fid en tial character, were taken from volume 15?
of Mr. Hamlin’ s scrap book and placed in the Board’ s f i l e s :
VOLUME 159
Page 9 - Letter from F.R.Agent Hoxton to Mr. Hamlin enclosing chart
showing fo r the member banks o f D is tr ic t the ra tio of various
expense items to gross earnings.
Page 53 - Earnings and Expenses of the F.R.Banks - March 1 9 2 6 .
Page 57 - Report with Appendices Concerning the F.R. Pension B i l l .
Page 58 - Memo from Mr. Smead to Mr. Hamlin re nonmember banks e l
ig ib le fo r membership in the F.R. System on basis o f cap ital
stock requirements.
Page 67 - (X - 450 7 ) Re Letters to Committee on Banking and Currency
re L eg isla tio n .
Page 68 - Memo from Mr. Smead to Mr. Hamlin re System’ s holdings of
U.S. s e c u r itie s .
Page 69 - Proposals by Professor O.M.W. Sprague fo r the Consideration
o f the Advisory Committee.
Page 71 - Memo to accompany report of F.R. Agents Committee on Member
Bank Reserves.
Page 75 - Report o f Federal Reserve Agents Committee on Member Bank
Reserves to the Federal Reserve Board.
Page 77 - Bank and Demand Deposits (index fo r 48 Banks in F.R. D is t. l ) .
Page SO - Comparison o f C apital, surplus, Deposits and Resources of
Member and o f E lig ib le Nonmember Banks.
Page 83 - (X - 4212 ) A r tic le in the Commercial and Financial Chronicle
re ’’Imperfect working of F.R. System - over-saturating cre d it and
currency” .
Page 84 - Member Banks Borrowing Continuously in excess of ca p ita l
and surplus during March 1 9 2 6 .
Page 87 - Letter from Mr. Smead to Mr. Hamlin enclosing 1.
Statement showing the combined ca p ita l and surplus o f the
European central banks including Great B ritain compared
with the Federal Reserve System.
2 . Statement showing amount of notes outstanding of the F.R.
Banks and o f the various central banks of Europe.
3.
Statement showing the ca p ita l and surplus combined and the
deposits o f a l l the commercial banks in the U.S. compared
with corresponding figu res fo r Great B rita in .
Page 91 - Average amount of ’’F lo a t" carried by the F.R. Banks on
weekly statement dates during March 1 9 2 6 .
To:
The Files
-
2-
Page 95 - Letter to Mr. Hamlin from E.R. Kenzel re F.R. Pension B i l l .
Page 97 - (X - 1314 ) McFadden B i l l to Revise F.R. A ct.
Page 99 - Memo from Mr. Goldenweiser to Mr. Hamlin re P rices, Currency
and the Reserve Banks.
Page 107 - Limits o f Expansion o f Bank Credit in Relation to Member
Bank Reserves.
Page 114 - S t a t is t ic a l data on F.R. Banks.
Page 116 - Memo to Mr. Hamlin from Mr. Goldenweiser re distrib u tion
o f paper pledged with the F.R.Agent of New York as c o lla te r a l
fo r F.R. notes.
Page 131 - Memo from Mr. Goldenweiser to Mr. Hamlin re t o ta l volume
o f member bank reserve deposits against net demand deposits o f
a l l member banks.
Page 150 - Memo from Mr. Smead to Mr. Hamlin re amount o f sa la ries
paid to Governors and F.R. Agents and the to ta l cost of the
F.R. Agent’ s departments as compared with operating departments
o f the banks.
Page 151 - Memo to Mr. Hamlin from Mr. Goldenweiser re wage increases
o f school teachers, e t c ., with cost o f liv in g .
Page 155 - Memo to Mr. Hamlin from Mr. Goldenweiser re comparative
strength of F.R. Banks of New York and Chicago compared with
certain European Central banks.
#
Fe
de ral
o f
R
R
ese rve
Ba
n k
i c h m o n d
A p ril 8, 1 9 2 6 •
Hon. Charles S. Hamlin,
Federal Reserve Board,
7/ashington, D. C.
Dear l.Ir• Hamlin:
I am enclosing you a chart which I have had
prepared, showing for the member banks of th is d is t r ic t
the r a tio of various expense items to gross earnings*
This idea, of course, is not origin al v/ith
me, as the Federal Reserve Board has published in the
B u lle tin a sim ilar chart for each d i s t r i c t . My work
has been to divide the chart of th is d is t r ic t so as to
cover seven ty p ic a l banks of d iffe re n t s iz e s .
This
w ill enable each member bank to compare his ovm situ a
tio n v/ith that of the average in his particular group.
The chart has been supplied for d istrib u tion
at our stockholders* meeting, i t being my idea to fu r
nish at every meeting of the stockholders some data
with respect to the member banks* own business, which
they may find informative and understandable.
Very truly yours,
Urn. W. Hoxton
Federal Reserve Agent
F
Page 9
Volume 159
✓
ANALYSIS OF
AVERAGE EXPENSES AND PROFITS
OF
M E M BE R B A N K S -
FIFTH F E D E R A L R E S E R V E DISTRICT
C A L E N D A R YEAR 1925
PREPARED
CROUPS
(d Ou
«TJ
BY
F E D E R A L R E S E R V E B A N K O F R IC H M O N D
According to
Amount of
Loans and
Investments
PER CENT OF GROSS EARNINGS
.78 3.39 2.79
1 “ “ 000
26.1
2.
3.
300,CCO to
600,000
27A
5.0
v //////s//s//////////////>
4- W g
5.96 4.25
32.5
3.4
21.7
3 2 .4
4.2
20.2
/ 8.5
7.7
16.2
7.15 5.13
6.7
16.7
1.32 7.91 5.01
3.7
2,001,000 to
5,000,000
/////////////////////////>
5,000,000 to
10 ,000,000
vy////////////////////////*
7. Over
10,000,000
4.0
16.1
19.2
18.0
3.6
31.6
2 0 .4
5.86 5.13
10.9
16.8
1.45 7.85 6.70
18.0
17.3
6.7
22.8
1.39 8.25 6.22
'/////////////////////////*
2.9
3 0 .9
19.8
18.3
5.8
LEGEND
19.8
10
36.6
6.
11.8
601,000 to
1,200,000
5.
5.3
2 4.4
Interest on
Deposits
Interest on
Borrowed
Money
Salaries
Taxes and
Other
Expenses
Losses
2 2 .3
Net Profits
Mr. Hamlin
£
C O N F I D E N T I A L
Not for publication
F e d e ra l
R e serv e
Bank
J
^ ^ ton
From
d is c o u n te d
b ills
Month
E a r ji i n
| From pur {ch ased b i l l s
j and U. S.
| s e c u r itie s
of
g. s
1
| From
j o th e r
sou rces
March
T o ta l
C u rrent
ex
p en ses
£1 5 5 ,1 9 1
$3 ,5 6 9
$ 2 8 7 ,9 8 6
$1 6 3 ,2 1 6
New Y ork
**77,759
3 2 4 ,6 1 2
2 1 ,5 0 2
8 8 3 ,2 7 3
P h ila d e lp h ia
2 0 3 ,5 8 6
1 1 0 ,2 5 5
1 5 ,2 5 2
Cl e v e l and
1 9 2 ,2 8 5
1 5 7 , **98
Richmond
1 *+7,978
A t la n t a
C h ica go
tu*
St. 4916
EARNINGS AND EXPENSES OF FEDERAL RESERVE BANKS
$ 1 2 4 ,2 2 6
192b
Annual r a t e
C u rrent
o f c u r r e n t n et | C u rren t
net
jn et e a r n
e a r n in g s on
e a r n in g s
a v era g e
in g s to
p a id -in c a p ita l
Mar. 31
Y ear 1 9 2 6
B a la n ce a v a i l a b l e f o r d e D iv id e n d s p r e c i a t i o n a l l c >wances, s u r
p l u s , fr a n c h is e t a x , e t c .
a ccru e d
to
On F eb . 27
On Mar. 31
M ar. 31
$12*+, 77O
1 6 .8
$ 4 7 8 ,4 4 2
$ 1 2 9 ,8 6 5
$3**8,577
$ 2 6 8 ,9 9 3
5 3 0 ,0 0 2
353 ,87 1
1 2 .3
9 8 7 ,2 5 8
4 9 9 ,6 2 4
4 8 7 ,6 3 4
3 0 2 ,9 5 6
3 2 9 ,0 9 3
1 8 8 ,3 8 7
1 4 0 ,7 0 6
1 3 .9
38**, 125
1 7 6 ,**78
2 0 7 , 61+7
1 2 6 ,5 7 2
1 3,941
3 6 3 , 721+
2 1 2 ,0 3 0
1 5 1 ,6 9 4
1 3 .3
3 7 3 ,6 1 3
199,**S7
1 7 4 ,1 1 6
8 9 ,7 2 1
4 7 ,0 1 5
22,031
2 1 7 ,0 2 4
1 1 7 ,7 6 4
9 9 ,2 6 0
1 9 .4
205 ,23 9
9 0 , 3b 2
1 1 4 ,8 9 7
4 5 ,8 2 0
1 4 0 ,^ 9 7
100 , bOl
b ,7 b 5
2 4 7 ,bb3
1 1 3 ,0 3 5
1 3 4 ,b 2 8
3 2 .3
4 5 3 ,3 4 3
7 2 ,1 9 8
381,11+5
27 1 ,0 4 7
2 5 6 ,5 1 7
2 3 6 ,7 0 0
2 9 ,5 1 5
5 2 2 ,7 3 2
315,862
2 0 2 ,8 7 0
1 4 .8
5 8 7 ,5 3 9
239,161
3^8 ,3 7 3
226 ,36 1
S t . L o u is
3 8 ,6 9 3
1 1 4 ,8 8 1
4 ,2 0 9
2 0 7,73 3
1 i s , 567
8 9 ,2 1 6
2 0 .4
2b3 ,95 1
7 7 ,0 1 0
1 8 b ,941
12 3,4 70
M irmeapoi i s
2 2 ,7 5 9
7 b ,8 b 0
9 ,9 8 9
IO9 , 0O8
88,039
20,96^
7 .8
4 4,961
**7 ,5 1 8
* 2 ,5 5 7
*7 ,1 9 4
^ J ls a s C it y
5 5 >453
1 4 3 ,4 8 2
2 3 ,5 7 5
22b, 510
1 3 S ,2 4 3
8 8 ,2 6 7
2 4 .5
2 4 5 ,4 1 5
6 3 ,5 8 1
181,83**
1 1 4 ,7 4 7
D a lla s
2 2 , 56b
1 3 1 ,7 1 0
5,35**
1 5 9 ,6 3 0
9 6 ,2 0 4
6 3 ,4 2 6
1 7 .4
2 2 8 ,7 5 3
6 4 ,1 3 8
i 6**,bi5
1 2 2 ,6 3 0
1 70 ,7 9 1
2 0 0 ,8 4 2
8 ,1 6 4
3 7 9 ,7 5 7
1 9 9 ,9 2 8
1 7 9 ,8 6 9
2 5 .7
4 1 6 ,2 2 2
1 2 3 ,6 1 9
2 9 2 ,6 0 3
1 5 4 ,0 0 3
1 ,9 0 b ,910
1 ,6 0 6 ,5 2 s
1 ,1 9 7 ,2 7 2
l,S 59,& *»7
1 , 72:9 , 7^2
1 , 3 9 4 ,3 7 0
1 6 8 ,8 6 b
1 4 2 ,5 2 5
1 2 6 ,4 1 7
3 ,9 3 5 ,^ 2 3 2 ,2 8 5 ,8 7 7 1 ,6 4 9 ,5 4 6
3 ,5 3 2 ,8 5 5 2 , 2 1 9 ,9 6 0 1 ,3 1 8 ,8 9 5
3 ,2 1 8 ,5 5 9 2,3*+5,934
372 ,9 6 5
1 6 .2
1 4 .5
9 .0
4 ,6 6 8 ,8 6 1
1 , 7 3 3 ,0 3 1
2 ,8 8 5 ,8 3 0
1 , 8 3 9 ,1 2 6
2 , 1 5 0 ,0 2 5
1 , 6 9 6 , 1 5 *+
*+53,871
1 5 4 ,6 2 4
San F r.-in cisco
TOTAL:
Mar. 1 9 Hb
F eb. 1926
Mar. 1925
FEDERAL RESERVE BOARD
DIVISION OF BANK OPERATIONS
APRIL 10, 1926.
A
Sa ^
3
Page 53
Volume 159
^Deficit.
v
3
EARNINGS AND EXPENSES OF THE F.R. BANTS - MARCH 1926.
Total earnings of the Federal reserve banks during
March 1926 were $3,935,000, an increase of $700,000
over the corresponding month last year, practically all
of the increase being in earnings from discounted bills,
Total earnings during the first three months of this
year were more than $2,200,000 in excess of earnings
during the first quarter of 1325 .
Current expenses during the first quarter of 1926
were $290,000 less than during the corresponding quarter
last year, $Uo,000 of which represented the reduced cost
of currency, and $250,000 the decrease in operating ex
penses. Eight of the Tfederal reserve b antes show sub
stantial reductions in operating expenses during the
first quarter of this year as compared with the corres
ponding quarter of last year, while Boston, Philadelphia,
Atlanta, and St. Louis show increased expenses. Salaries
of officers, clerical staff and other employees, the cost
of Federal reserve currency, and other current expenses
for the first quarter of 1926 and 1925 were as follows:
1926
$611,217
1925
$6 1 2 ,3*15
Salaries, officers
Salaries, clerical
staff
2,961,397 3.15§,151
Salaries, all other
633,021
6 36 ,172
Cost of F.R. currency
*+32,^05
*171 ,S62
Other current expenses 2,1*13,330 2,20*1,213
Total
6,791.370 7,082,7^3
Increase
or decrease
- 1,123
-196,75^
+
-
i,gi*9
3 9 ,^ 5 7
- 55.SS3
-291,373
;
As a result of increased earnings and reduced ex
penses, current net earnings of the Federal reserve
banks at the end of March amounted to $U,669 ,000 as
against $2,150,000 at the end of March 1925. All of the
Federal reserve banks except Minneapolis have earnings
substantially in excess of expense and dividend require
ments. Earnings of the Minneapolis Federal reserve bank
on March 31 were $2,557 less than expense and dividend
requirements for the first quarter.
It is understood
that the Open Market Investment Committee transferred
$10,000,000 of acceptances to the Minneapolis bam, on
April 12, which will no doubt result in a substantial in
crease in that bank's earnings.
Report with Appendices
Concerning ‘
the
Federal Reserve Pension Bill
Volume 159
This b i l l i s to permit the Federal Reserve Banks and their s t a ffs to
unite in establishing and operating a pension system.
The b i l l confers the
authority in the form of creating a separate corporation, thus making i t pos
sib le to maintain a segregation of the pension finances from the operations of
the banks.
The plan which i t i s proposed to e stab lish under the authority granted
by th is b i l l i s to be maintained on the actuarial reserve basis so that at a l l
times the pension corporation w ill be in a s e lf-liq u id a tin g condition and in a
position to meet a l l obligations without the necessity of an assessment against
either the Federal Reserve Banks or their employees.
The b i l l and also the plan for the operation of the fund appear to
have been prepared with care and are designed to permit of the operation of a
pension plan which w ill be prudent without being meagre and reasonably ade
quate without being extravagant.
the banks and the employees.
The plan i s obviously equitable as between
I t provides by i t s terms that the banks sh all not
be permitted to contribute to the support of the plan a sum greater than the
to ta l contributions of the employees with in te r e s t.
The entire plan i s obviously designed to provide the b en efits which
may be reasonably expected from such a plan, both to the employees and to the
banks.
The follow ing discussion deals with the matter under three heads:
1.
2.
3.
1.
The general prin cip les of the b i l l and of pension plans,
The detailed provisions of the b i l l ,
A description of the pension system which i t i s proposed
to set up under the authority of th is b i l l .
The General P rinciples of the B i ll and of Pension Plans:
The d e s ir a b ility of providing fo r the orderly retirement of super
annuated employees through a formal pension plan i s becoming more and more
2
recognized in large in d u stria l, commercial and fin an cial organizations.
A very
considerable number of the larger banks in the United States already have pen
sion systems.
These pension plans are not, generally speaking, established because
of philanthropic motives, even though in many cases the entire cost of the pen
sion i s borne by the employer, but, on the contrary, they are generally estab
lish e d because i t i s recognized that unless there i s a formal plan providing
for the retirement of the superannuated, there in evitab ly comes into being an
informal and at times involuntary system of pensions under which many employees
are kept in the service and on the payroll long past the period of their useful
n ess,
This condition e x ists because there are few instances where a corporation
w ill turn a d r ift at the age of 65 or 70 an employee who has rendered 20 or 40 or
possibly 50 years of fa ith fu l service, at a salary which would have made i t d if
f i c u l t for him to have saved an amount necessary to provide for old age.
Fur
thermore, in a l l such cases there i s , in addition to the direct lo s s , a further
lo s s due to the general in e ffic ie n c y of the organization and the in a b ility to
promote younger men to positions of r e s p o n s ib ility .
With a formal pension plan, on the contrary, provision i s made during
the entire period of employment for the accumulation of such
a
sum as w ill, at
the age of retirem ent, be su fficien t to provide a pension, and such accumulation
.
is generally in part provided by the employee.
i
In the case of the p artic u lar
plan under discussion, at le a st half of th is cost w ill in the aggregate be pro
vided by the employees.
The Federal Reserve Banks are in substantial competition for th eir
personnel with the other banks of the communities where they are lo ca te d .
Other
banking establishments are able frequently to o ffe r fin an cial rewards above the
««
3
salary paid.
O fficers can be stockholders and share in the bank* s prosperity,
often they are helped to do so .
Employees receive bonuses in favorable years.
The o ffic e r s and employees of the Federal Reserve Ranks can receive no fin an cial
advantages beyond the salary paid.
I t i s highly desirable that the reserve
banks should be enabled to secure and retain the services of competent o ffic e r s
and employees and that they should not merely act as training schools from which
a l l of the more competent would graduate into more a ttra ctiv e service elsewhere.
One of the la rg est problems in business administration i s the turnover.
Every
time a trained o ffic e r or employee transfers himself from the service of one
corporation to another, the corporation he leaves su ffers a l o s s .
I t lo se s the
experience he has b u ilt up in the course of his years of employment.
train some other person in the duties he had already learned.
I t must
Training i s
co stly and the cost of lo sin g large numbers of the righ t kind of men ju st when
their training has reached the point where they become exceptionally e f f ic ie n t ,
can e a sily exceed the cost of a w ell organized pension system.
The purposes of the Federal Reserve Banks in establishing a pension
system may be b r ie fly stated as follow s, none of which i t w ill be noted i s in
any sense philanthropic.
1*
2m
3.
4.
5*
To a ttr a c t the most desirable class of personnel,
To create conditions of employment which w ill reduce to the
minimum the turnover of the more desirable employees,
To improve the morale of the s ta ff through providing, so far
as i t be fe a s ib le , a fe e lin g of security with respect to
the future and of confidence against the great unpreventable
hazards of l i f e ,
To provide a means whereby the banks may f u l f i l l th eir duty to
th eir employees and to society in general through a pension
plan fo r superannuated employees,
To accomplish a l l of the foregoing with the greatest possible
e ffic ie n c y and the minimum of expense through the estab lish
ment of a plan under which the employees themselves w ill con
tribute approximately one-half of the amount necessary to
support i t .
4
The follow ing i s a detailed analysis of the provisions of the b i l l .
2.
The Detailed Provisions of the B i l l .
The d e ta ils of the proposed statute are important and deserve careful
consideration.
general purpose.
They seem such as are necessary and proper to carry out i t s
The follow ing i s an analysis of then.
Section 1 .
The incorporators are the Governor of the Federal Reserve
hoard and the Governors of the Federal Reserve Banks.
The enabling authority
i s given in the form generally used by the most careful le g is la tiv e charters to
pension funds, such as those to the Carnegie Foundation, the Church Pension Fund
and others.
The purpose of the fund i s stated as being to provide pensions or
other forms of support for o ffic e r s and employees of the Federal Reserve Banks,
the Federal Reserve Board and the Federal Reserve Agents and their dependents
on such terms and conditions as the corporation may from time to time approve
and adopt*
I t also provides that the pension corporation may provide pensions
for i t s o ffic e r s and employees and their dependents.
I t i s expressly prohibited
from providing a pension or other form of support for any member of the Federal
Reserve Board or for any persons other than those described.
I t also provides
that the corporation may, i f i t seems desirable, extend the provisions of the
plan to include member banks and th eir o ffic e r s and employees under conditions
hereinafter referred to under Section 5*
Section 2 .
The usual powers of a corporation are conferred.
The trustees ore constituted as fo llo w s:
One by the Federal Reserve
Board, one by the board of directors of each Federal Reserve Bank, thirteen in
a l l ; one by the employees of the Federal Reserve Board, one by the employees of
each Federal Reserve Bank, thirteen in a l l ; the to ta l number of trustees to be
thus tw enty-six.
5
Section 3 ,
The corporation sh a ll be without cap ital stock and shall
be conducted without p r o f it .
I t shall be exempt from a l l taxation, except taxes on real e sta te, and
such taxation as may be imposed by Congress*
The plan of pensions, or any substantial m odification thereof, must be
approved in writing by the Federal Reserve 3 oard before i t sh all go into opera
tion*
The corporation sh all render an annual report to the Federal Reserve
^oard, as prescribed by i t ,
S e ^ tio n ^ *
and may be examined by that Board.
The pension system sh all be conducted on the contributory
princip le and i t i s expressly provided that the to ta l contributions to be made
by the Federal Reserve Ranks and the Federal Reserve board sh all not in the
aggregate exceed the to ta l contributions *to be made by the said o ffic e r s and em
ployees with in te r e s t.
S e c t io n ^ ,
The corporation may, with the express approval of the
Federal Reserve Board, open the pension system to member banks of the Federal
Reserve Systom, upon terms to be la id down by i t and approved by the Federal Re
serve Board*
Section 6.
The power of amendment and repeal i s expressly reserved*
Section 7 *
The act i6 to become immediately operative.
There seems to be no good reason why Congress should not authorize
the Federal Reserve Banks to esta b lish th is fund; indeed fo r the reasons already
stated i t would seem to be the duty of Congress to do so .
I t should also be re
membered that Congress has i t s e l f already approved of the principle of pensions
by establishing under the act of May 22, 1920 , a retirement system for the em
ployees of the c la s s ifie d c i v i l service, and a pension system fo r the diplomatic
and consular service under the act of May 24 , 1924 , fo r reorganizing and improving
6
the foreign service of the United S tates.
In an appendix w ill be found a discussion of the provisions of the
plan which i t i s proposed to estab lish under the authority conferred by th is
o i l l and also a comparison of th is plan with the retirement systems referred to
alovt which have already been authorized and established by Congress*
This ap«
pendix has been prepared by Mr. Monell Sayre! vice president of the Church Pension
rund of the Episcopal Church.
He has had wide experience in the pension fie ld
and served as pension adviser to the committee representing the Federal Reserve
-^an.-s in the preparation of th is plan and he i s , therefore, thoroughly fam iliar
not only with the theory and practice of pension plans in general, but with the
proposed plan in p a rticu lar.
APPENDIX
3•
Description of tho Ponsion Plan 'Vhich i t i s Proposed
to Set up under the Authority of th is B ill«
This pension system was prepared after a thorough discussion and a nos
exhaustive examination of pension lite r a tu r e and the organization and working of
e x istin g pension funds by the Committee on Pensions of the Governors Conference
with the Federal Keservo Board, a ssisted by expert actuarial and pension ad
v is e r s and by counsel.
I t has been approved by the Governors Conference and by
the board of directors of each one of tho twelve Federal Reserve Banks.
There are three great hazards which beset a l l human l i f e and which are
not within the sphere of p re v e n ta b ility .
When any of them happen groat economic
suffering may r e su lt unless there has been forethought.
These hazards are:
a . - Death
b. - Old ago
c . - Permanent d is a b ility
The f i r s t two are an altern ative which i s certain to happen.
la s t does happen in a certain percentage of l i v e s .
The
I t may be said to be the
function of pensions to covor one or a l l of these hazards.
The core of every
pension system i s tho protection against tho socond, tho hazard of old age.
A ll pension systems have that in some form.
There are a great number of pension
plans in operation and hardly any two of them are alike in every resp ect.
Some
plans attempt to provide a pension fo r a l l of the dependents of the employee;
others only to a widow or to a widow and minor orphans, and others only to the
employee.
Vory careful consideration was given to n il of these points with a
viow to providing a plan which would bo economically sound and which would
reasonably provide against the hazards which i t was designed to meet, with the
re su lt that i t was decided that the proposed plan should provide three b e n e fits :
1 . - An old age allowance
2 . - An allowance for to ta l and permanent d is a b ility
3 . - A doath benefit
2
There are two general methods by means of pensions of granting pro
tectio n against the hazards of l i f e .
One method i s to promise the stipulated pension and to be s a tis fie d
i f the money i s in hand to pay i t as i t becomes due.
cash disbursement method.
This i s known as the
I t may be reasonably sa tisfa c to ry for a Government
with i t s unlimited resources, although even then i t might be better to know
accurately to what extent the Government i s committed, but with respect to a l l
other organizations than the Government, th is method has obvious disadvantages,
both to the employer and the employees.
Under such a plan the contributions made by present employees, i f
the plan be a contributory one, are used for the payment of pensions to those
already r e tir e d .
For a few years a l l goes w e ll, but the cost of the annual
pension b i l l continues to grow and gradually i t s figures mount up to sta r tlin g
t o t a ls , u n til i t i s realized that staggering l i a b i l i t i e s have been created and
that the money which has been contributed by present employees to provide for
their pensions has been used up in paying the pensions of those already retired ,
and that the employing corporation i s faced with the necessity of either dipping
deep into i t s own pocket or repudiating i t s promises to i t s employees.
Thero are several c la ssic examples of t h is .
The Government of New
South Wales at the beginning of the Twentieth Century found the pension fund
for the Government employees to have arrived at the point where there was
l i t e r a l l y not a penny in the pension treasury. .The Carnegie Foundation, a l
though endowed by Mr. Andrew Carnegie with the large sun of -315, 0 00 , 0 0 0 , for
the comparatively small cla ss of professors in American colleges of a selected
type, found i t s e l f at the end of ten years where i t required a great additional
sum and also was forced to undergo a drastic reorganization.
Tho municipal
pension funds of New York City were found, during ivlayor Mitchell* s administra-
i-ion by a s c ie n t if ic in v e s tig a tio n inaugurated by him, to havo a t o t a l
l i a b i l i t y above t h e ir assets of approxim ately 0315,000,000*
The other method is to accumulate the pension beforo it is due*
-‘
■his is known as the actuarial reserve method and is the one generally followed
by all sound plans*
Under it during the entire period of the employees service
there is being paid either by himself or his employer or both, into the fund
such contributions as will enable the pensioning authorities to have in hand
when the contingency happens on which the pension is to become available, the
actuarial equivalent of what is needed to pay it during all of its continuance*
There are numerous obvious advantages to such a plan:
1*
It is absolutely reliable, provided, of course, that scientific
methods have been used*
When the employee becomes old enough to retire there
is money in the treasury to pay the pension*
The pension fund is solvent at
all times and if necessary could be liquidated at any time*
2*
It makes use of the power of interest*
The relatively small
payments made for a considerable period of years, together with the interest
thereon, provide the funds necessary for the payment of the ponsion#
In the
average case, the pension paid will more largely represent the interest
accumulations than the actual contributions*
3*
This method provides its own automatic check against extravagant
demands for pensions or ill considered promises*
The danger of this in the
cash disbursement method is great for nothing has the pov/er to deceive like the
cost of pensions*
mere technical change in the method of calculating the
pensions, a reduction of only a few years in the required length of service, a
slight lowering of the age of retirement, these would all seem of slight con
sequence if the cost were not carefully calculated on the actuarial reserve
4
b a sis.
I f every time employees are tempted to ask these l i t t l e changes, they
are n ecessarily also informed of the increased yearly cost to themselves, noth
ing of such a serious nature would be done thoughtlessly.
In the actuarial
reserve method the slig h te st variation in the rules i s immediately reflected
in the rates of contribution.
For these reasons the proposed pension system of the Federal Reserve
Banks w ill operate on the actuarial reserve b a s is .
The follow ing i s a b rie f outline of the b en efits and the method of
determination of each.
BENEFITS
1»
The Age Allowance
The age allowance can be claimed at age 6 5 *
sory*
At age 70 i t is compul
The amount of the age allowance w i ll be 1 1 /2 ^ of the average salary
during the entire period of service, m ultiplied by the number of years of ser
vice*
The advantage of average salary as the b asis of calculation i s great*
I t s ta b iliz e s a l l of the calculations and prevents violen t changes in salary
near the end of service from operating either to the disadvantage of the pension
fund or of the employee*
2*
Allowance fo r Total and Permanent D isa b ility
This attaches a fte r one year of service in the case of employees who
have been subject to medical examination upon employment, or a fte r fiv e years
in the case of the employee who was not subject to medical examination upon
employment, and is granted upon the action of a medical department to be created
by the pension fund.
The amount of t h is allowance i s 1 1/ 4^ of the average
salary, m ultiplied by the number of years of se rv ice , but with the minimum in
any event of a calculation of 20 years' service, thus providing a minimum
5
disability allowance of 25‘* of average salary, except that if the ago allowance
upon retirement at ago 65 would have been less than 25^> of average salary, then
the disability allowance shall bo the same as the ago allowance would have been*
The purpose of this minimum of 25;h is to provide such a sum as will be reason
ably effective in the case of disability during the oarlier years of service*
Experience has shown that the two principal causes of total and permanent dis
ability soon after entrance into the service are tuberculosis and insanity; ex
cept in a few such cases the period of disability is comparatively short*
3*
The Death Benefit
This is one year’s salary at the rate of salary being paid at the
time of death and is paid only in the case of employees in active service at
the time of death, i* e-, not yet retired on a pension*
A pension system does
not perform its purpose unless there is some provision for the family*
In a
pension plan which makes no such provision there is always grave dissatisfaction
on the part of those who place their family obligations ahead of the necessity
of providing for themselves, yet the adjunct for provision for dependents no
matter how arranged, will cause equal dissatisfaction*
In a body of many
thousands of employees there will be innumerable varieties of obligations to
dependents; aged parents, a sister housekeeper, nephews or nieces who look to
the employee as the sole support, even more remote relations or kinsfoik whose
claim may be present in a moral sense*
To include all possible cases in a
financial system would be an intolerable financial burden, yet wherever the
line is drawn there will bo circumstances which will constitute a valid claim
that it should be drawn elsewhere#
It is doubtful if any pension system which
has included any other than the pensioner himself has worked satisfactorily*
Nevertheless there remains a need for some recognition of the claim of
6
dependents.
*
year#s salary enables the fam ily somewhat to adjust i t s e l f to
the altered circumstances caused by the salary earner’ s death and reliev es
immediate necessity#
I t does not add too g re a tly to the c o st.
When to th is
i s added the return of contributions made by the employee himself with in terest
thereon a reasonable compromise seems to be made in a d if f ic u lt problem.
For
an employee of long service th is return w i l l be a considerable provision in
its e lf.
VESTING OF CONTRIBUTIONS
The opinion is la rg ely re fle cte d in modern pension p ractice that
where individuals themselves contribute to a pension system they or their
estates should receive back the f u l l amount of th eir contributions with in te r e s t,
otherwise the pension system becomes a tontine arrangement for the benefit of
the employees who survive.
This is especially marked i f the pension system
contains no extension of pensions to dependents,
th erefo re, i t is here provided
that in the event of death, resignation or d ism issal, the o ffic e r or employee
or h is estate sh a ll receive back a l l that he has contributed with in te r e st.
If the o ffic e r or employee r e tire s upon a pension and the amount of the pension
he had drawn up to the time of his death does not equal the amount of his con
trib u tion s with in terest and the amount of the contributions of the bank on his
behalf with in te r e s t, h is estate or designated beneficiary sh all receive the
balance.
This la t t e r may be regarded as in lie u of the death b en efit that
would have been paid had the employee died in active service.
MAXIMUM BENEFITS
No contributions and no b en efits are to be paid with respect to that
part of any salary which is in excess of 0 1 8 ,0 0 0 per annum.
mistake i f such a maximum is placed at too low a fig u r e .
I t is a grave
The retirement of
7
superannuated officers who have received comparatively large salaries is even
more important than the retirement of the average class of employees whose
duties may more easily be delegated or shifted, and experience shows that the
retirement of higher officials is materially hastened or retarded accordingly
as there is a pension provision reasonably apportioned to their salaries.
The
cost to an employer of contributing toward a few such cases is negligible*
The overwhelming portion of pension costs is the average pension*
Under this limitation there would be very few pensions of more than
0-2,000 per annum and probably none as much as $6 ,000%
Few things are more un
wise than the sentimental considerations which, while permitting those in the
average position to retire when superannuation impairs their efficiency, throw
obstacles in the way of the elimination of those who in positions of authority
when their faculties are impaired by age, materially diminish the effectiveness
of the entire organization*
CALCULATION OF COST
The calcule.tion of the cost is in terms of percentage of salary
according to age of the employee at entrance into the service*
This is the
scientific method as it takes into consideration precisely the length of time
over which the contributions will be made*
Of course, this requires that the
calculation of the pension also shall be in percentage of salary, so that the
contrinution required of each individual shall be exactly in proportion to the
benefits he receives*
The total normal cost of the plan outside of the
accured liabilities will average probably not in excess of 7 1/2 of the payroll*
DIVISION OF COST
As stated in the bill, the banks will be prohibited from contributing
more than the aggregate contributions of the employees with interest.
The total
3
contrioutions to be made, therefore, will be borne by the banks and by the
employees approximately equally.
On the average the bank share of the normal
cost, outside of the accrued liabilities, will approximate 3 1/2j* of the payroll.
ACCRUED LIABILITIES
This is one of the great problems which confronts every pension system
at its inception.
The problem arises from the past service of present em
ployees before the pension fund began to operate*
The scope of the problem is
the sum of all of the contributions which would have been made by all of the
present employees and on their behalf during all of their previous service,
with compound interest.
The Federal Reserve Banks are fortunately still comparatively young.
v'hen the plan was first projected the accrued liabilities were found to be a
little less than ^2,000,000 (as of October 1, 1920), but they grow rapidly and
?s of October 1, 1924, they were estimated to be about 06,000,000.
rule the employing corporatxon bears rll of the accrued liabilities.
As a general
Under the
proposed plan the Federal Reserve Banks will bo prohibited from paying more
than half of these accrued liabilities, the other half must be borne by the
existing cmnloyoos themselves.
There are various ways in which this problem
may be mot but the more practicable one and the one which will probably be
adopted, is to amortize the accrued liabilities over all of the remaining yes.rs
of the existing employees service by making their rates of contribution for
those remaining years of service somewhat higher.
The banks would have the
option of raising their contributions correspondingly or of meeting their
portion of the accrued liabilities at thie inception of the plan.
CALCULATION OF INTEREST
Interest rates play an important part in any pension plan.
To
9
guarantee any fixed rate might impose, under conditions which conceivably
cojld arise, a severe strain upon the fund finances#
Yet to impose a rate
arbitrarily might amount to the fund’s making a profit upon its individual
contributors#
A fair and equitable way would seem to be to adopt provision
ally those rates which enter into conservative insurance and pensions cal
culations over extended periods of time with the proviso that once in every
five /ears those rates, so far as the return of contributions are concerned,
will be adjusted in accordance with the actual experience of the fund f or the
preceding quinquenium#
SCOPE OF THE SYSTEM
-i-he proposed pension system will cover every employee entering the
service of the Federal Reserve Banks and the Federal Reserve Board after the
establishment of the fund.
It is obvious that if the banks are to benefit
fully from the establishment of the fund, there should be no exceptions with
respect to those to be included#
Employees already in the service of the banks
are to have the option of joining#
ercised within a reasonable time*
This option must for obvious reasons be ex
It has been fixed at one year*
The bill
confers the useful power of enabling this pension fund, with the approval of the
Federal Reserve Board, to admit member banks on terms which will impose no fin
ancial obligation on the Federal Reserve Banks#.
Very few banks, and all of
these are in the great cities, possesssufficient employees to enable them to
establish a pension system of their own#
It will, therefore, be most useful
i
on equitable terms to give the member banks, especially those in the country
and the smaller cities, each with only a handful of employees, the privilege
of participating in a pension system.
Particularly will this be true in a
system which, by its employment of exports, should have a pension plan of
10
peculiar excellence, but whether this privilege shall be given to the member
banks and on what conditions, is left in the discretion of the Federal Reserve
Board*
.
ILLUSTRATIVE TABLE
Following will be found certain tables which may be useful in giving
an idea of the plan*
Table I gives the percentage of salary payable as rates of contribu
tion by employees and by the banks, without taking into consideration the
accrued liabilities.
Table II shows the relative percentageswith the accrued liabilities
as they might be amortized over the entire remaining period of employment*
Table III is an illustration of the workings of the plan in an
average case, showing the annuity that would be paid after various lengths
of service in the case of total disability and also the pension that would be
paid upon retirement either at age 65 or 70.
I
Table 1
Percentage of Salary Payable as Rates of Contribution
by Employees and by Banks, without taking into
Consideration the Accrued Liabilities.
Age at
Entrance
Payable
by
Male Employees
Payable
by
Female Employees
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
3*36
3.42
3.48
3.54
3.60
3.66
3.73
3.80
3.87
3.94
4.01
4.09
4.17
4.25
4.33
4.42
4.51
4.60
4.69
4.78
4.87
4.97
5.07
5.18
5.29
5.40
5.51
5.62
5.74
5.8 6
5.98
6.10
6.23
6.36
6.49
6.62
6.75
6.89
7.03
7.17
7.31
7.46
7.61
7.76
3.34
3.42
3.50
3.58
3.66
3.74
3.82
3.90
3.99
4.06
4.17
4.26
4.36
4.46
4,56
4.66
4.76
4.8 7
4.98
5.09
5.20
5.31
5.42
5,54
5.66
5.78
5.90
6.03
5.16
6.29
6.42
6.56
6.70
6.84
5.98
7.12
7.27
7.42
7.57
7.73
7.89
8.05
8 .21
8.37
Payable by
Banks for
Male Employees
3.02
3.09
3.18
3.27
3.36
3.45
3.54
3.65
3.77
3.89
4.01
4.13
4.26
4.39
4.53
4.69
4.8 6
5.04
5.23
5.43
5.65
5.88
6.12
6.38
6.64
6.94
7.26
7.60
7.93
8.28
8.54
8.79
9.04
9.28
9.52
9.82
10.13
10.50
10.90
11.33
11.82
12.47
12.48
14.8 6
Payable by
Banks for
Female Employees
.
2.96
3.04
3.14
3.27
3.40
3.53
3.66
3.79
3.92
4.06
4.21
4.37
4.53
4.70
4.89
5.06
5.28
5.49
5.73
6.01
6.31
6.66
7,04
7.46
7.91
8.43
9.01
9.58
10.02
10.36
10.64
1QS92
11.17
11.42
11.67
11.91
12.10
12.23
12.26
12,24
12.34
12*59
13.02
13.62
I
Percentage of Salary Payable as Rates of Contribution
by Employees and by Banks taking into Consideration
Service Rendered prior to the Establishment of the
Pension System.
Age at
Entrance
Into
Retirement
Fund
SERVICE RENDERED PRIOR TO ENTRANCE INTO RETIREMENT SYSTEM
0 Years
: 2 Years
: 4 Years
:
6 Years
: 8 Years
; 10 Years
M E K
i
21
25
30
35
40
45
50
55
60
64
4.03
4.28
4.64
5.05
5.52
6.05
6.65
7.31
8 .03
8.65
..
i
4.38
4.78
5.27
5.84
6.54
7.40
8.60
10.00
10.00
.
%
%
i
i
4.47
4.93
5.48
6.15
7.00
8 .12
9 .84
10.00
10.00
5.08
5.68
6.44
7.44
8.82
10.00
1G .00
10.00
5.15
5.8 5
6.73
7.8 6
9.50
10.00
10.00
10.00
6,01
6.98
8.26
10.00
10.00
10.00
10.00
5,56
6.39
7.38
8.63
10.00
10.00
10.00
10.00
6.64
7.74
9.15
10.00
10.00
10.00
10.00
IV 0
21
25
30
35
40
45
50
55
60
64
4.01
4.34
4.78
5.29
5.84
6.44
7.10
7.83
8.62
9.29
4.49
4.99
5.57
6.23
7.00
7.94
9.25
10.00
10.00
4.54
5.19
5.85
6.62
7.55
8.^7
10.00
10.00
10.00
U
E N
5.38
6.13
7.01
8.09
9.58
10.00
10.00
10.00
:
:
:
:
:
:
:
>
•
TABLE I I I .
ILLUSTRATION OF AVERAGE WORKING OF PENSION PLAN
at ago 25
The following schedule gives an illustration of the average working
of the Pension Plan in the case of a male employee engaged at age 25, when
he can immediately avail himself of the advantages of the Pension Plan.
It is believed that the vast majority of employees will be en
gaged at an age younger than 25*
The employee's contribution rate at age 25 is 3*60)4. The Bank's
contribution rate is 3.36/4, covering service pension, disability pension,
and death benefit.
Af ter
service
f or
Average
year’ s
salary
for age
attained
0 yrs*
01,440
Payment to Beneficiary Annuity in
Employee’s pay- on death in service, event of
ments to fund viz; 1 year’s salary total disaccumulated with and return of own ability in
4 interest
contributions
service
0
0 1,440
784
2,924
0
10
"
2,140
20
w
2, 660
2,226
4,88 6
519
30
”
3,040
4,566
7,606
874
40
"
3,340
8,184
11,524
1,272
45
"
3,460
10,644
14,104
—
0
Pension
on
Retirement
442
0
^1, 526
1,780
>/hen an employee enters on his pension the value of the pension
vests and the pension is computed on the basis of guaranteeing the return
of all the contributions available at the date the pension is entered
upon. The following table shows
SUM PAYABLE AT DEATH OF PENSIONER
Af ter
Pensioner en
tering at 65
Pensioner en
tering at 70
0 yrs.
5 "
10 "
15 ”
016,900
9,270
1,640
•
0
017, 200
8,300
0
0
APPENDIX
Comparison of
The Proposed Federal Reserve Pension Fund
with
The Civil Service Retirement and Disability Fund
and
The Foreign Service Retirement and Disability System*
BASIS OF SYSTEMS
The Civil Service Fund and the Foreign Service Fund are operated upon
the cash disbursement method.
That is, the pensions are paid out of the moneys
in hand, and if those moneys at any time come to be insufficient to pay the
pensions falling due in that year, the United States Treasury is drawn upon*
"h© resources outside of appropriations to be made by Congress are manifestly
insufficient of themselves to provide the pensions promised;
the time will at
length arrive when Congress will be asked to make appropriations from the
treasury.
^hose appropriations will consist of the difference, in each year,
of the amount of the pensions and the total amount of the employees* contribu
tions for that year.
Each successive year will make this difference a larger
amount, until the amount required from the Treasury will be a very great sum.
The Federal Reserve Pension Fund will operate on the actuarial re
serve method.
Each year there will be paid into its treasury, by the combined
action of the employees and the banks, the exact amount which, placed at com
pound interest, Trill in the future pay the pensions arising from the proportion
of their entire service given by the employees in that year.
Thus there will
never be, in any given year, the obligation to pay for services rendered in any
other year than that one.
In the cash disbursement method, as illustrated by the two existing
funds, all of the pensions, accumulating through a long succession of years,
I
I
2
must be paid with no resource but the contributions of employees due in that year
and appropriations by Congress.
In the actuarial reserve method, as illustrated
by the proposed fund, the money to pay a pension, however long this pension may
be payable, is accumulated before the pension is granted.
The increase of the
pension roll, no matter h0w M g h a figure it may attain, imposes no strain on
the pension system;
the strain has been taken care of during the years of the
employee’s service*
THE ACCRUED LIABILITIES
No specific provision is made in the Civil Service Fund and the
Foreign Service Fund for the accrued liabilities which are nevertheless assumed.
These must all be paid out of the public treasury.
always, in an old service, tremendous.
The accrued liabilities are
But they never appear during the very
early years, because not enough persons retire at once to equal the contribu
tions of the active employees.
These are certain, however, to appear within a
limited number of years, and then to mount up progressively to gigantic propor
tions.
The proposed Federal Reserve Pension Fund will have its accrued lia
bilities all provided beforehand by the arrangement that the employees at the
time the plan goes into operation (the class for whom the accrued liabilities
attach), will pay such rates of contribution as will, during their period of
service, provide their share (one-half) of such liabilities.
The banks will
do the same thing for their share (the other half) o* the accrued liabilities,
or may pay them down at once and forever get rid of them.
DIVISION OF COST
The existing Federal Government pension plans provide for the payment
of certain specified cont ribut ions by the employees affected.
The United
States Government pays for the rest of the pensions, be they more or less,
3
except in the Foreign Service Fund, where the contributions of the Government
are not to exceed the total of such by the employees.
The enabling bill before Congress for a pension system in the Federal
Reserve Banks specifically provides that the total contributions of the banks
cannot exceed the total contribut ions of the employees with interest.
CONTRIBUTIONS BY EMPLOYEES
In the Civil Service Retirement Fund all employees pay two and a
half per cent of their salary.
In the Foreign Service Retirement Fund each
employee pays five per cent of his salary.
In the proposed Federal Reserve Bank Fension Plan the- rates of con
tribution fixed for the employees are graduated according to age of entrance
into the service and are sufficient, together with the contribution to be made
by the banks, whose total contributions may not exceed the total contributions
made by the employees with interest, to provide the total benefits promised by
the plan.
^he average contribution by the banks for the normal operation of
the plan, exclusive of providing for accrued liabilities with respect to
present employees, would approximate 3 l/2“
£ of the payroll,
THF BFNFFITS
The Age Allowance.
This is available in the Civil Service ^und at either ages 62, 65 or
70, depending upon the class of service.
ment age is 65, and compulsory at 70.
In the Foreign Service Fund the retire
In both services there is the require
ment of fifteen years of service,
'The proposed Federal Reserve Plan fixes the age of retirement as op
tional at age 65, and compulsory at age 70.
No service requirement is made, it
being regarded as unnecessary when pensions are proportioned to length of ser
vice,
*
I
•
4
TVe amount of the pensions in the Civil Service Fund varies according
to certain classifications.
To employees witv> thirty or more years of service
it may be as ^igfc as sixty per cent of the average basic salary during the last
ten years of service.
If employees >»ave only fifteen years of service it may
be as low as thirty per cent of t^e average basic salary of the last ten years
of service.
T^ere is a minimum of $180 a year and a maximum of $720 a year*
T^e pensions in the Foreign Service Fund are figured in the same
general way as in the Civil Service.
to be no minimum;
The difference here is that there appears
and the maximum, instead of being $720 a year, is $5,400 a
year.
Service in tropical or especially unhealthful countries may have an
allowance made by which each year of such service counts as a year and a half.
The Federal Reserve Banks will take as the basic computation always
the average salary over the entire period of service and never any form of the
terminal salary.
The method of calculation for every employee is the same, one
and one-half per cent of the average salary during the entire period of service,
multiplied by the number of years of service.
There is no minimum.
A maximum
is fixed by considering, both for contributions and for pensions, any salary
over $18,000 a year as at that figure.
Under this plan there will be very few
pensions in excess of $2,000 per annum and probably none in excess of $6,000
per annum.
Disability Allowance.
For the Civil Servioe Fund a disability allowance is provided for
any employee totally incapacitated, with the provision that this is not to be
available unless he has had fifteen years of service.
The amount of the allow
ance is calculated in the same way as the age allowance.
The Foreign Service
i
I
5
Fund has exactly the same provisions.
The Federal Reserve Bank will give a disability allowance in case of
total and permanent disability after one year of service in the case of employ
ees who were subject to medical examination upon employment, and after five
years of service in the case of those who were not subject to a medical examin
ation.
The amount of this allowance is 1 l/4$ of the average salary, multiplied
by the number of years of service, with a minimum in any event of a calculation
of twenty years* service, thus providing a minimum disability allowance of
of average salary;
25%
except that if the age allowance upon retirement at age 65
would have been less than 25/£ of average salary, then the disability allowance
shall be the same as the age allowance would have been.
Death Benefit,
Neither the Civil Service nor the Foreign Service Fund has a distinct
death benefit, but of course provides for the return of all of the unused con**
tributions made by the employee, , with interest to date of death.
A distinct death benefit is proposed by the Federal Reserve Fund con
sisting of a year’s salary at the rate received at the time of death.
Also,
all contributions by the employee are returned with interest.
Separation from Sorvice.
The Civil Service Fund returns to an employee resigning or being dis
missed all of his contributions with interest at four per cent compounded an
nually.
The Foreign Service Fund, upon the resignation or dismissal of an em
ployee, returns to him seventy-five per cent of the total amount which he has
contributed;
no interest is allowed.
The proposed Federal Reserve Bank Fund will, to an employee resign
ing or being dismissed, return all of his contributions with interest.
*
#
ft
6
Vested Interest*
In the event of the death of a pensioner in the C iv il Service Fund
who has not received in pension the equivalent of his own contributions with
in te re st to date of death, h is estate receives the balance*
The rule i s the
sane in the Foreign Service Fund.
In the proposed Federal Reserve hank Fund the to ta l contributions
made by the employee and on his behalf w i l l , upon h is retirement, v e s t .
I f the
to ta l subsequent payments made to him as a pension do not equal the amount thus
vested, then any excess i s to be paid to h is estate or a designated beneficiary*
No other death b en efit i s provided in the case of death occurring a fte r r e tir e
ment on pension.
F o r m N o . 1.11.
Office CorrespoiSence
Mr. Hamlin
To
FEDERAL RESERVE
BOARD
D ate __ A pril
20,, 1926
Subject:.
From____ Mr. Sinead___________________________
2— *495
With reference to your memorandum of A pril 17, addressed to
Mr. Goldenweiser, I wish to state that the la te s t figures of non
member banks e lig ib le fo r membership in the Federal Reserve System
on the b asis of ca p ita l stock requirements are as of June 30 , 1924.
The follow ing table shows the number and resources of such banks on
June 30, 1924, the percentage of resources of state member banks to
the t o t a l resources o f a l l e lig ib le state banks and tru st companies,
and the percentage o f resources of a l l member banks to the resources
of a l l e lig ib le banks:
Total
resources
Number of
banks
State banks and tru st companies:
Members
E lig ib le nonmembers
1,570
13,598
$ 1 3 ,2 2 1 ,9 8 3 ,0 0 0
1 1 ,5 8 5 ,5 5 7 ,0 0 0
Total e lig ib le , member and nonmember
15,168
2 4 ,8 0 7 ,5 4 0 ,0 0 0
Ratio of member sta te banks to t o ta l
e lig ib le state banks and tru st
companies
10 .4 #
A ll member banks, national and state
A ll e lig ib le member and nonmember banks,
national and state
Ratio of a l l member banks (National
and s ta te ) to a l l e lig ib le banks
5 3 .3 #
9,650
3 5 ,7 7 7 ,2 5 6 ,0 0 0
23,248
4 7 ,3 6 2 ,8 1 3 ,0 0 0
4 1 .5 #
7 5 .5 #
Between June 30, 1924 and December 3 1 , 1925 the resources of
member banks have shown/substantial increase as may be seen from the
follow in g:
June 30, 1924
December 31, 1925
Increase
Page 58
Volume 159
M T i n w n T r«!»rtM «
$ 3 5 ,7 7 7 ,2 5 6 ,0 0 0
4 1 ,4 2 5 ,2 9 5 ,0 0 0
5 ,6 4 8 ,0 3 9 ,0 0 0
¥? %
m
in
FEDERAL RESERVE B O A R D
W ASH IN G TO N
A D D R E S S O F F IC IA L C O R R E S P O N D E N C E T O
TH E FEDERAL RESERVE BOARD
X-4507
January 21, 1926.
SUBJECT:
Letters to Committee on Banking and Currency
re L egislation .
Dear S ir:
Tne federal Reserve .board has recently addressed
three le tte r s to the Chairman o f the Coirnnittee on Banking
and Currency oi the Rouse of -Representatives, copies of wi
are enclosed for ycur information, as follow s:
(l)
(2)
-Expressing the Board's views on and recommending certain amendments to H. R. 2, the socalled McFadden B i l l ;
Recommending an amendment to Section 13 of the
Federal Reserve Act extending the maximum
maturity of advances by Federal reserve hanks
to mernher banks on th eir promissory notes when
such notes are secured "by e lig ib le paper; and
^commending the enactment of le g is la tio n to
proh ib it the use of the words "Federal" ,
"Reserve" and "United States" by banking as
socia tion s, e tc .
Very truly yours,
Walter L. Eddy,
Secretary.
(Enclosures)
Page 67
Volume 159
( COPY )
X-4500
January 8, 1926.
honorable Louis T. McFadden, Chairman,
Committee on Banking and Currency,
House o f Representatives,
Washington, D. C.
Ry dear Congressman:
.
The Federal Reserve Board welcomes the opportunity
afforded oy the request conveyed in your le t t e r o f December 11,
1925, to express it s opinion on your B i l l , H«R. 2 , amending the
National Bank Act and the Federal Reserve Act.
The urgentyimportanco of lib e r a liz in g the law so as
to enable national banks to compete more e ffe c tiv e ly with State
in stitu tio n s has long been recognized by the Board, and appro
p riate le g is la tio n fo r this purpose lias boon under considera
tion during the la s t year by a sp ecial committee of o ffic e r s o f
various Federal reserve banks a ssiste d by the Board’ s D ivision
of Rosearcn and S t a t is t ic s .
The opinions herewith submitted
arc based in largo measure upon the work of this Committee a fte r
consultation with the Federal Advisory Council.
many of the provisions of the b i l l as introduced
are approved without change, but the Board ventures to suggest
considerable changes in Section 5200 designed in part to c la r ify
that very complicated section and in part to lim it certain somewnat hazardous classes o f loans*
n ile strongly in favor of
lio e r a liz in g the sta tu te , the Board fe e ls also that i t i s highly
desirable to introduce additional safeguards, e sp e c ia lly in
view of the numerous bank fa ilu r e s in recent years.
The Board,
therefore, submits a lim ited number o f suggestions with this
object in view. They are designed mainly to secure . :ore adequate
data regarding the cord.itions o f the banks through examination
and i t is not believed that they would hamper in any way tlx
conduct oi i t s aisinoss by any w ell managed bank.
X-4500
in their present form:
Section 2 ( a ) , amending subsection 2 of Section
5135 o f the Revised Statutes so as to
give national banks indeterminate char
ters in lie u of charters for a term of 99
years.
Sectiorj 2(b), amending subsection 7 of Section
5136 of the Hovised Statutes so as to regu
la te the safe deposit business and tin busi
ness of buying and s e llin g investment secur
i t i e s when transacted by national banks.
Section 3 , amending Section 5137 of the Revised
Statutes so as to permit the purchase by na
tional banks of such real estate as shall be
necessary for their accommodation in the
transaction of their business rather than
merely such as may be necessary for their im
mediate use.
Section 4 . amending Section 5138 of the Eevised
Statutes so as to authorize the chartering
of national banks in outlying sections of
large c it ie s with a cap ital of $100,000.
Section 5, amending Section 5142 of the Eevised
Statutes so as expressly to authorize na
tional banks to increase their cap ital by
means o f stock dividends.
Section 6, amending Section 5150 of the Revised
Statutes so as to authorize the board of
directors of a*national bank to designate
a directo r in lie u o f the president to be
chairman of the beard of d ir e c to rs«»
Section 13, amending Section 5208 of the Revised
Statutes re la tin g to the c e r tific a tio n of
checks by o ffic e r s , d ire cto rs, agents or
employees o f Federal reserve banks and mem
ber banks of the Federal Reserve System.
Section 14, amending Section 5211 of the Re
vised Statutes so as to permit resorts
oi condition of national banks to the
Comptroller of the Currency to be signed
by the vice president or assistant
cashier.
#
-3 ~
X-4500
Section 15, amending the fourth paragraph o f Sec
tion 13 of the Federal Reserve Act so as
to permit federal reserve "banks to red is
count for meiriber hanks the e lig ib le paper
of any one borrower in an amount eoual to
that which may be borrowed law fully from
any national banking association under the
terms of Section 5200 o f the Revised Stat
utes as amended.
Section 16, amending Section 22 of die Federal Re
serve Act, so as to moke th e fts by any bank
examiner or assistan t sank examiner from any
menoer bank o f the Federal Reserve System a
Federal ©ffense.
REAL ESTATE I/JdvS.
The Board approves of that rortion o f Section 17 of your B i l l
Willcn would amend Section 24 of the Federal Reserve Act so as to
broaden the power of national banks to make loans on real e sta te
and increase the aggregate amount of such loans which may be made
7 any nationa.1 bank from o3 1 /3 per cent o f i t s time deposits to
oO per cent oi the national bank's savings d e p osits; but the Board
is opposed to that portion o f this section of the B i ll (-page 27,
lin e s 4 to 9, in clu sive) which would provide that the rate of in
terest which national banks may pay upon time d ep osits, savings
eposits or other deposits sh a ll not exceed the maximum rate au
thorized to be paid upon such deposits by State banks or trust
companies.
CONSOLIDATION OF NATIONAL BANXS .
Uoon consideration o f Section 1 of your B i l l , which would
amend the Consolidation Act o f November 7, 1918, by the addition
thereto of a new section sim plifying the -procedure involved in
tne consolidation o f State banks with national banks, the Board
voted to approve a l l of such proposed new section exceot that
p o itio n tnereof which r e la te s to branch banking.
SECTION 5200 OF THE REVISED STATUTES.
^The Board recommends that the follow ing be substituted
! or ^ c t i o n 11 of your B i l l , which would amend and reenact Sec
tion o’200 o f the Revised Statutes;
-4 -
X—1500
"See. 11.
That Section 5200 of the Revised Statutes
o f the United States, as amended, he amended to read as
follow s:
'Section 5200.
The total direct l i a b i l i t i e s to
any national banning association o f any person, firm,
company or corporation for money borrowed sh a ll a t no
time exceed 10 per centum of the amount of the cap ital
stock o f such associ at ion actu ally paid in and unimpaired
and 10 per centum of it s unimpaired surplus fund; and
the aggregate l i a b i l i t i e s to any national banking asso
ciation of any person, firm , company or corporation, to w it,
the direct l i a b i l i t i e s for moneys borrowed and the indirect
l i a b i l i t i e s as surety, endorser or guarantor, where such
surety, drawer, .endorser, or guarantor obtains a loan
from, or discounts paper v/ith, or s e lls paper under
guarantee to , any such asso cia tio n , sh a ll at no tirao exceed
25 per centum of the amount of the capital stock of such
association actu ally paid in and unimpaired, and 25 ner
centum of i t s unimpaired surplus fend.
hYithin the meaning of th is section : (a) The
l i a b i l i t i e s of any company or firm sh a ll include , the
l i a b i l i t i e s o f the several members th ereof; (b) where
the m ajority o f the stock of any corporation is owned
by any borrower the l i a b i l i t i e s of such corporation as
surety, drawer, endorser or guarantor sh a ll be considered
part of the aggregate l i a b i l i t i e s of such borrower; and
(c) a l l l i a b i l i t i e s of the actual borrower on accommoda
tion paper, whether in the form of l i a b i l i t i e s as maker,
acceptor, surety, drawer, endorser, or guarantor shall
be considered d irect l i a b i l i t i e s within the meaning of
this section .
'The limitations prescribed above in the first
paragraph of this section shall be subject to the
following exceptions:
1(1) L ia b ilit ie s arising out of the discount
or purchase o f the follow ing classes of paper sh all
be subject to no lim itation based upon the amount o f
such ca p ita l and surplus except where both the drawer
and drav^ee, or both the maker and payee, are corpora
tions and one o f such corporations is a f f i l i a t e d with,
or a subsidiary o f,th e other - i . e . , where a majority
o f the stock of one of such corporations is owned by
the other cr by the stockholders thereof:
(a) h i l l s of exchange drawn in good fa ith
.against a ctu a lly e x istin g values.
-5-
X-4500
(b) Commercial or business paper a ctu ally owned
by the person, company, corporation, or firm
negotiating the same.
(c) Lraits and "b ills of exchange secured "by shin
ning documents conveying or securing t i t l e to
goods shipped.
^ _
'^2) L ia b ilit ie s arising out of the discount or purchase
of the follow ing classes of paper sh all be subject to no
lim itation based upon the amount of such cap ital and surplus I
•
(.i/ Demand obligations which are or have been
discounted or purchased for the account o f
the drawer or endorser and which are secured
by documents covering commodities in actual
process o f shipment.
^0 / -Bankers5 acceptances o f the kinds described
in section 13 of the Federal Reserve Act.
(c) Notes secured by not le ss than a lik e face
amount of bonds, notes, or c e r tific a te s of
indebtedness of the United S ta te s. *
*
addition to the 10 per centum permitted under
the f i r s t paragraph o f th is section, l i a b i l i t i e s to any
national banning association may be incurred in an amount
e q u a l 15 per centum o f the paid in and unimpaired ca p ita l
and 15 per centum of the unimpaired surplus fund of such
national banking a ssociation , when such l i a b i l i t i e s are
evidenced by notes secured by shipping documents, warehouse
receip ts, or other such documents conveying or securing t i t l e
covering read ily marketable non-perishable stap les, the actual
market value of which is not at any time le ss than 115 per
centum o f the face value of ouch notes, and which arc f u lly
covered Dy insurance i f i t is customary to insure such sta p le s;
but this exception sh a ll not apply to l i a b i l i t i e s of any ~
person, corporation, firm or company or the several members
thereof a risin g from the same transactions and secured upon
bhe identical staples for more than six months; Provided. !'
however , That l i a b i l i t i e s of this character may be incurred' for
period o f not more than throe months in an additional amount
equal oo 15 per centum of the paid in and unimpaired cap ital
and 15 per centum of the unimpaired surplus fund of such
national banking a ssociation , in addition to the 10 per centum
permitted under the f i r s t paragraph of th is section and
the 15 per centum hereinbefore permitted under th is paragraph.
-
6-
£-4500
1(4)
In addition to the 10 per centum permitted under
the f i r s t paragraph of th is section , l i a b i l i t i e s to any
national banking association may be incurred in an amount
equal to 15 per centum of the paid in and unimpaired cap ital
and 15 per centum of the unimpaired surplus fund 'of such
national banking a ssociation , when evidenced by notes secured
by documents conveying or securing t i t l e to liv e stock which
is being prepared for market during the period of the loan
evidenced by such notes, and the market value o f which is
not au any time less than 115 per centum of the face amount
of such notes; but this exception sh a ll not apply to the
l i a b i l i t i e s o f any person, corpcraction, firm , or company*
or the several members thereof, for more than nine months;
-X pvideg., h T h a t
exceptions (3) and (4) are not
cumulative but only altern a tive exceptions - i . e . , only
one o^ txie two sh a ll be available to the same borrower and
not both at the same tim e ,1"
This proposed revision of Section 5200 is a re su lt of a thorough
study which the Board has caused to be made by a committee of o ffic e r s
o f the federal Reserve System aided by the Board’ s D ivision of Research
and S ta tic tic s*
The recommendations of th is committee were also con
sidered by the Federal Advisory Council. In tke opinion of the federal
Reserve Board, this revision combines the b est features of the various
d rafts of Section 5300 incorporated in the b i l l s on this subject here
tofore introduced in Congress, together with certain new provisions
which the Board believes to be d esirab le.
Those features of th is pro
posed revision which are taken from drafts heretofore considered by
Congreso require no comment; but I sh a ll comment b r ie fly on certain
o f the proposed new features.
.
Subdivisions (b) and (c) o f the second paragraph of the
above draft are new and are intended to bring under the 1C$> lim ita
tion of the f i r s t paragraph the indirect l i a b i l i t i e s of a f f i li a t e d
corporations and l i a b i l i t i e s o f the borrower on accommodation paper,
he Board believes th is is necessary in order to cover cases where
the drawer and drawee or the maker and indorser are in e ffe c t a
sin gle in te r e st.
The f i r s t and second exceptions are broadened so as to apply
to l i a b i l i t i e s arisin g out o f the purchase o f paper as w ell as
the discount o f paper. A provision is also inserted in the f i r s t
exception excluding from the benefits o f that exception paper on which
the drawer and drawee, or the maker and payee, are a f f i li a t e d cor
porations. The puroose o f th is provision is to exclude some portion
of those notes and b i l l s o f exchange which are in substance nothing
more than the obligations of a sin gle in te r e s t.
Certain language is inserted in subdivision (a) of the
second exception to exclude the holding of accepted demand obligations
for an in d efin ite period of time by a bank,-a practice which involves
making wnat is su b sta n tia lly an unsecured loan on single name paner*
- 7 -
X-4500
A new subdivision (c) is added to the second exception, ex
cluding from any limitation notes secured by not less than a like face
amount of bonds, notes or certificates of indebtedness of the United
States. This is based on the theory that,- since banks may purchase air
unlimited amount of these securities, it would seem logical to permit
them to make loans in unlimited'rmounts on notes collateralad by such
securities.
^
The third exception,- which relates to liabilities on notes
secured by shipping documents, warehouse receipts, or other such docu
ments conveying or securing title, covering readily marketable non
p e n s lao e staples, would permit such loans to be made in an amount
equa. to 15 per centum of the bank's capital and surplus in addition
to tue oasic 10 per cent for periods not in excess of six months, and
m aii additional amount equal to 15 per cent of the bank's capital and
surplus for a period of not more than three months. The provision re
quiring such staples to be insured is qualified in such a way as not
to amply to such staples as pig iron, loacL, zinc, etc., which arc not
customarily insured. The above draft of this exception is believed to
be a fair compromise between the corresponding provisions of the various
other drafts of this bill which have heretofore been introduced in Con
gress; and the Board believes that it will enable the banks to supply
all proper financial facilities for the marketing of such staples.
„
Tlie fourth exception, which relates to loans on livo stock is
changed so as not to apply to loans on dairy or breeder herds nor to
tne liabilities of any one borrower for more than nine months.
SUGUESTED AMENDMENTS DESIGNED TO 5UPENG-THFN THE B AUKS.
Tne Board also desires to recommend the following additional
amendments^ to the National Bank Act and the Federal Reserve Act and
requests that these proposed amendments be incorporated in your bill:
1.
That Section 5202 of the Revised Statutes as amended be
further amended by adding at the end thereof a new paragraph to read
as follows:
’’All obligations of every nature both direct
and indirect arising out of the sale, pledge, or hypothe
cation of any one of its assets by a national banking asso
ciation shall be definitely recorded upon its books at the
time such assets are sold, pledged, or hypothecated. For
each lailure to comply with this requirement a national
banking association shall be subject to a fine of Five
Hundred Dollars, to be imposed by the Comotroller of the
Currency."
-w 4--u "
P 10 P°^al is designed to cover the rather common practice
°x the assumption ©| obligations by banks in an informal fashion,
often m correspondence between bank officials. These obligations
-
8
-
X-4500
frequently escape the notice of bank examiners because they are not
definitely recorded on the books of the banks.
^
2. That Section 5240 of the Revised Statutes of the United
States, as amended, be further amended by adding at the end thereof a new
paragraph reading as follows:
"Whenever in the judgment of the Comptroller of the
Currency any national banking association is so closely re
lated in management, operation or interest to any other bank,
banking association, trust company, securities company or
investment company that an examination of such national bank
ing association fails to disclose its true fbhdition in the
absence of detailed information regarding such other related
institution, such national banking association shall (a) ob
tain from such related institution and furnish to the Comp
troller of the Currency a copy of a report of an examination
of such related institution made by the State authorities
simultaneously with an examination of such national banking
association made by examiners appointed by the Comptroller of
the Currency, or (b) by such other means as may be deemed
satisiactory by the Comptroller of the Currency, furnish to
the Comptroller of the Currency detailed information regard
ing the condition and operation of such related institution.
In such cases the Comptroller of the Currency may, upon request,
furnish the State Supervisor of Banking, or other similar of
ficers, copies of reports of examination of such related na
tional banking association. If any national banking association
shall fail to comply with the requirements of this paragraph after
a demand for such compliance has been made by the Comptroller of
tne Currency, the Comptroller shall report the facts in the
case to the Federal Reserve Board, which may, after a hearing,
issue an order depriving such national banking association of
the privilege of receiving any discounts, advancements or ac
commodations from the Federal reserve bank of which it is a mem
ber until it has complied fully with all demands made by the Comp
troller of the Currency pursuant to the provisions of this para
graph. The Federal Reserve Board shall send a copy of such order
by registered mail to such national banking association and a
copy to the Federal reserve bank of' which it is a member; and,
after receipt of said order, such Federal reserve bank shall
not rediscount any paper for, or make any loan, advancement,
or otner extension of credit to, such national banking associa
tion until said Federal reserve bank has been notified by the
Federal Reserve Board that such national banking association
has complied fully with the requirements of this paragraph."
This proposal is designs'.to secure adequate information 'regarding
national banks v/hich are related to other institutions and in particular to
afford some check upon certain abuses frequently engaged in by*chains of
banks. Uuring the last few years a number of such chains havo colTapsed,
-
£
-
X-4500
cmd investigation shor/s that when a national hank is in such a chain
an examination of it fails to disclose its true condition, due to the
shiiting of assets hack and forth between the various institutions which
make up the chain.
Section 9 oi the Federal Reserve Act as amended be filf'th'elf
amended 07 inserting therein, immediately after the sixth paragraph
thereof, a new paragraph reading as follows;
"Whenever in the judgment of the Federal Reserve
hoard any member bank is so closely related in management,
operation and interest to any other bank, banking asso
ciation, trust company, securities company or investment
company that an examination of such member bank fails
to^disclose its true condition in the absence of
derailed information regarding such other related
institution, such member bank shall (a) obtain from
sucn related institution and furnish to the Federal
Reserve Board^ a copy of a report of an examination of
suuh related institution made by the State authorities
simultaneously with an examination of such member bank,
or (0 ) oy such other means as may be deemed satisfactory
by the Federal Reserve Board, furnish to the Federal
Reserve Board detailed information regarding the con
dition and operations of such related institution.
In such cases the Federal Reserve Board may, unon
request, furnish the State Supervisor of Banking,
or other similar officers, copies of reports of any
examination of such related member bank which ha 3
been made^oy direction of the Federal Reserve Board or
of the Federal reserve bank by examiners selected or
approved ^y^thc Federal Reserve Board. If any member
bank shall fail to comply with the requirements of
this paragraph after a demand for such compliance
has been made by the Federal Reserve Board, said Board
may, after a hearing, issue an order depriving such
member bank of the privilege of receiving any discounts,
advancements or accommodations from the Federal reserve
bank of^which it is a member until it has conplied
fully with all demands made by the Federal Reserve
Board pursuant to the previsions of this paragraph,
ihe Federal Reserve Board shall send a cony of such
older by registered mail to such member bank and
a copy to the Federal reserve bank of which it is a
membex, and, after receipt of said order, such Federal
reserve bank shall net rediscount any paper for, or
make^any loan, advancement, or other extension of
credit to, such member bank until said Federal re
serve bank has been notified by the Federal Reserve
Board that such member bank has complied fully with
the requirements of this paragraph."
*
- io -
X-4500
This proposal is similar to the preceding and is intended to apply
to State cr.nks and trust companies which are members of the Federal Reserve
System. At present the only penalty for non-compliance with any provision
of the Federal Reserve Act by State member banks is that provided for in
the seventh paragraph of Section -9 of the Federal Reserve Act, which author
izes the Federal Reserve Board to expel from the Federal Reserve System
any State member bank which fails to comply with the provisions of that
Section. The penalty suggested above is less drastic but is nevertheless
thought to be sufficient.
4,
That Section 5146 of the Revised Statutes of the United
States,' as amended, be further amended to read as follows:
"Sec.5146. Every director must, during his
whole term of service, be a citizen of the United States, and
at least tnree-fourths of the directors must have resided in the
State, Territory, or District in which the association is located,
or within fifty miles of the location of the office of the asso
ciation, for at least one year immediately preceding their elec
tion, and must be residents of such State or within a fiftymile territory of the location of the association during their
continuance in office. Every director must own in his own right
at least ten shares of the capital stock of the association of
which he is a director, unless the capital of the bank shall
not exceed $25,000, in which case he must own in his own right
at least five shares of such capital stock. Any director who
ceases to be the owner of the required number of shares of the
stock, or who pledges or hypothecates the same, or who becomes
in any other manner disqualified, shall thereby vacate his
place.
"Uo national banking association shall make
a loan or loans aggregating more than Five Hundred Dollars
to any salaried officer of such national banking association
or to any corporation in which such officer or any director
of such national banking association ov/ns or controls a major
ity of the stock or of which he is an officer or director, un
less (a) such loan is fully secured by readily marketable col
lateral, or (b) such officer or director has first made availaDle to the board of directors of such national banking associ
ation by filing with such national banking association in ap
proved form a financial statement of such officer or of such cor
poration, as the case may be, which financial statement shall
accurately show the financial condition of such officer or cor
poration at the close of the last fiscal or calendar year pre
ceding the loan. A violation of this provision shall disquali
fy any such officer or director from serving as such and vacate
his place."
- 11 -
X—4500
ir.is would amend Section 5146 in two reseects: (1) The last sen
tence 01 that section as it now reads would he amended so as to dis
qualify a director who pledges or hypothecates his stock. This is in
tended merely to meet an apparent oversight in the law. (2) A new oaragrapn would oe added relating to loans to officers of national banks
and to^.corporations the majority of the stock of which is owned or con
trolled by ofticers or directors of national banks.
JV
Section 5205 of the lievised Statutes of the United
o ates, as amended* be further amended to read as follows:
u. .
"See.5205. Every association which shall have
xailed to pay up its capital stock, as required by law,
and every association whose capital stock shall have be
come unpaired by losses or otherwise, shall, within two
months after receiving notice thereof from the Comotroler oi the Currency, pay the deficiency in the capital
si oc a ., by assessment upon the shareholders pro rata for
the amount of capital stock held by each; and the Treasurt^G TJnited States shall withhold the interest upon
all bonds held by him in trust for any such association,
upon notitication from the Comptroller of the Currency,
t"i ?thf ! ise notlfied ^
him* If a n y such association
sha-ul iau. to pay up its capital stock, and shall refuse
o
go m
icu.daoion, as provided by law, for two months
c*. ^r reCo-iar.g notice from the Comptroller, a receiver
may be appointed to close up the business of the associa
tion, according to the provisions of section fifty-two hun
dred and thirty-four: And provided, That if any shareholder
oi shareholders of such bank shall neglect or refuse, after
two months notice, to pay the assessment, as provided in
nib section, it shall be the duty of the board of directors
o caine a sufiicient amount of the capital stock of such
shareholder or shareholders to be sold'at public auction
(,ai er hirty days' notice shall be given by posting such
notice of sale in the office of the bank, and"by Publishing
suen nonce m a newspaper of the city or town in which the
Danu is located, or in a newspaper published nearest thereto),
to maze good the deficiency, and the balance, if any, shall
e returned to such delinquent shareholder or shareholdersP i p p e d , however, That the Comptroller of the Currency may
ex en ^uhe time for payment of such assessment whenever in
m s judgment it may be deemed advisable."
months toStwnly,0fi'eCt °f th^S amendment would te t0 shorten from throo
tw° mon^hs the Period allowed for the payment of assossonired with
Capital 0 f a national hapk which has become imr
paired, with a provision authorizing the Comptroller o f the Currency
- 12 -
X-4500
to extend the tine for the payment of such assessment when in his
judgment it may he deemed advisable.
The Board has taken no definite action upon those provi
sions of your Bill which are not specifically mentioned above, but
if it does so I shall advise you promptly of the action taken.
T^e i?oard is also considering the advisability of recommending
the enactment of certain other amendments to the National Bank
Act and the Federal Reserve Act, but has not yet taken definite
action upon the matter. If it decides to recommend any
further amendments, I shall advise you at a lator date.
.
of interest to your Committee to know that
tnis letter was considered in detail at a meeting of the Federal
Reserve Board at which all members except the Secretary of the
Treasury and the Comptroller of the Currency were present and
was approved by all those members who were present.
If there is anything further that the Board can do to
be of any assistance to you in this or in any other matter,
please do not hesitate to call upon us.
Very truly yours,
D. R. Crissinger,
G o v e r n o r .
WW-OMC sad
P :S30 desire the Board will be
glad to furnish you
with additional copies of this letter for tiie use of the other mem
bers of your Committee.
( COPY )
X-4508
January 16, 1926.
Dear Mr. McFadden:
Deference is made to your letter of October 31st in which, it
is suggested that the maximum' maturity of advances made "by Federal
reserve oanks to member banks on their promissory notes be increased
from fifteen days to ninety days.
After careful consideration of this suggestion, and after con
sultation witn the Federal Reserve Agents and the Governors of the
several federal reserve banks, the Federal Reserve Board is of the
opinion that an amendment to thelaw increasing the maximum maturity
oi such notes when secured by paper eligible for rediscount or for
purchase by Federal reserve banks should be adopted. The Board does
not believe, however, that this increase in maturity of such notes
smould a p p ly when they are secured by bonds or notes of the United
States or by bonds of the T7ar Finance Corporation. I am enclosing
herewith a draft of an amendment to Section 13 of the Federal Reserve
Act wnich embodies the views of the Federal Reserve Board, which arc
concurred in by the Federal Reserve Agents and the Governors of the
several Federal reserve banks.
•Are proposed amendment would permit Federal reserve banks to
extend credit to their member banks for any period of time not ex
ceeding ninety days on the security of eligible paper, whereas under
the present law the length-of' the period of any such credit in excess
of fifteen days is determined necessarily by the maturity dates of
the notes which arc offered for discount at the Federal reserve banks.
The federal Reserve Board believes that it would be of distinct ad
vantage to member banks to be able to obtain credit for any desired
.
period up to ninety days, regardless of the maturity dates of the
notes in its portfolio. Especially is this true in those sections
of the country where seasonal credit is greatly demanded.
,
^t is also believed that the enactment of the amendment proposed
will be a means of saving country banks much inconvenience.
Member
banks’ notes with fifteen-day maturities are in many cases frequently
renewed and the proposed amendment would eliminate the necessity and
inconvenience of such frequent renewals. This would be of especial
assistance to those member banks which are so situated that more than
one day is necessary for the mails to pass to or from the Federal reserve
bank by which they are served.
-2-
X-4508
The Federal Eeserve Board feels that the increase in maturity for
member banks' notes should be limited to those notes secured by paner
eligible for discount or purchase by Federal reserve banks because* in
the opinion of the Board, it is unsound banking to permit the issue of
Federal Reserve "otes against promissory notes secured by Government
bonds as collateral.
F0r this reason the Board believes that the present
law is sufficiently liberal as respects advances to member banks on notes
secured by Government bonds.
Board.
The foregoing recommendation is made by a majority vote of the
Very truly yours,
D. B. Crissinger,
Governor.
Kon. Louis T. McFadden, Chairman,
Committee on Banking and Currency,
Washington, D. C.
X-4508-a
A
II'l l
To Amend Section 13 of the Federal
Reserve Act and for other purposes.
.
’
S
Be it enacted by the Senate and Hp-gse 0f Representatives of the
United States of
^Congress assembled. That the seventh para
graph of Section 13 of the Federal Reserve Act as amended he amended
and reenacted to read as follows:
Any Federal reserve hank may make advances for
periods not exceeding fifteen days to its member hanks on
their promissory notes secured by the deposit or pledge
of bonds or notes of the United States or of bonds of the
War Finance Corporation, or when authorized by the Federal
Reserve Board and subject to such conditions, regulations,
limitations and restrictions as the said Board may pre
scribe, may make advances for periods not exceeding ninety
days to its member banks on their promissory notes secured
by such notes, drafts, bills of exchange or bankers*
acceptances as are eligible for rediscount or for purchase
by Federal reserve tanks under the provisions of this A ct.
All such advances shall be made at rates of interest to
be established by such Federal reserve banks subject to
the review and determination of the Federal Reserve Board.”
Jarmary 16, 1926.
Honorable Louis T. McFadden, Chairman,
Committee on Banking and Currency,
House of Representatives,
Washington, D. C.
My dear Congressman:
The Federal Reserve Board has received many complaints about
the use of the words "Federal" or "Reserve", or a combination of the
two as part of the title of banks, corporations and firms other than
Federal reserve banks. In most of these instances it is obvious that
such words have been used in an attempt to take advantage of the
prestige enjoyed by the Federal reserve banks and to arrogate to
the^firms or corporations using such words part of the benefits ac
cruing from this prestige, and the Board lias felt that not only is
this purpose in itself objectionable but also that such use of
these words is likely to mislead the public and to cause confusion,
iideed, in several ins tan cos it has been found that the use of
such words by firms or corporations other than Federal reserve banks
actually has led to confusion. The Board has always opposed such
use oj. these words and feels that legislation to remedy the situa
tion is very badly needed.
Under date of September 2, 1922, the Board, called this
matter to your attention with a request that you endeavor to secure
the passage oi a law which would prevent this objectionable practice
as far as possible; and you introduced at the first session of the
53th Congress a Bill (H.R. 6145) for this purpose, a copy of which
is enclosed herewith. This bill, however, was never reported out by
the Banking and Currency Committee, and the Board desires to renew
its recommendation that this bill, or some other bill having sub
stantially the same effect, be enacted into law at the present session
of Congress and to express its hope that you will exert your best
efforts to this end.
.
^
noted that the first provision of the enclosed
bill would prohioit offering for sale as Farm Loan bonds any securities
not issued under the terms of the Federal Farm Loan Act. This provision
was included in the bill, at the time it was being prepared, at the
request of the Farm Loan Board, but the Federal Reserve Board is not
advised whether the Farm Loan Board is still desirous of securing
the enactment of such legislation.
A precedent for the enactment of a law of this kind is
found in Section 5243 of the Revised Statutes which prohibits the
X-4509
uso of the word "national" as T>art of the title of any bank not organized
under the National Bank Act. While the validity of that provision has
never oecn passed u~ion by the courts, it has been on the statute books
since 1873 and its validity has never been questioned. It is well
recognized that the good name or reputation of a bank is one of its
most valuable possessions and it would 3 eem clear that the same is true
of any banking system. Any device or scheme the natural result of which
would be to cause banks, corporations or firms of questionable stand
ing to be confused with the Federal reserve banks or which is likely
to mislead the public into believing1 that such banks, corporations or
firms are affiliated in some way with the Federal Reserve System
endangers the good name and reputation of the Federal Reserve System.
I’
c is believed, therefore, that the enactment of legislation to
prevent such abuses is necessary to protect the Federal reserve banks
and the Federal Reserve System. The Supreme Court of the United States
has recognized the principle that the nower to create national banks
carries with it the power to preserve them,(See First National Bank v.
Fellows, 244 U.S. 416 and cases cited), and the same must be true., as
to the Federal reserve banks. There would seem to be no doubt, there
fore, as to the constitutionality of a bill designed to protect the
reputation of the Federal reserve banks.
For your information there is also enclosed herewith a copy
of a memorandum prepared for the information of the Federal Reserve
Board containing a brief statement of the circumstances of each case
which has been called to the attention of the Board in which the word
"Federal” or the word "Reserve” or a combination of the two has been
used as a part of the name of a bank, corporation or firm other than
a Federal reserve bank or in the advertising of such a bank, corpora
tion or firm or where such use of these words has been attempted.
It is believed that a reading of the facts s$5t forth in this memoran
dum will convince any one of the necessity for some legislation to
prevent such abuses.
As you will note from the memorandum, the Board has sought
various ways of preventing the objectionable practices, but usually
with little success. The Board has several times requested the aid
of the Federal Trade Commission in these matters, but as this body
is without jurisdiction over banks or insurance companies its nower
to render material assistance has necessarily been greatly restricted.
The Federal Reserve Board hopes that you will do all that is
possible to secure the introduction and enactment into law of a bill
which will provide an effective remedy for this situation.
If agreeable to you, the Board will be glad to furnish a
copy of this letter and the enclosed documents to each member of your
committee in order that they may study them at their leisure.
Very truly yours,
Enclosures
W
CMC
D. R. Crissinger
Governor
68th Congress,
1st Session.
( COPY )
X-4509-a
H. E. 6145
IN THE HOUSE OP REPRESENTATIVES.
January 24, 1924.
I
'
Mr. McFadden introduced the following bill; which was referred to the
Committee on Banking and Currency and ordered to be printed.
A BILL
io urohioit oifering for sale as Federal farm loan bonds any securities
not issued under the terms of the Farm Loan Act, to limit the
use o+ the words "Federal", "United States", or "reserve",or
a combination of such words, to prohibit false advertising, and
for otxier purposes.
,
ENACTED BY THE SENATE AND HOUSE OF REPRESENTATIVES OF
•
THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED, That no bank"]
•
banking association, trust company, corporation, association, firm,
partnership, or person not organized under the provisions of the Act
of July 17, 1916, known as the Federal Farm L o a n Act, as amended, shall
advertise or reoresent that it makes Federal farm loans or advertise
or oner for sale as Federal farm loan bonds any bond not issued under
ohe provisions of the Federal Farm Loan Act or make use of the word
-^enexal or the words "United States" or any other word or words
implying government ownership, obligation, or supervision in advertis
ing or oflering for sale any bond, note, mortgage, or other securitv
not issued by the Government of the United States or under the ■oro-*
visions of the said Federal Farm Loan Act or some other Act of Cong
ress.
°
^uii;0 . 2, xhat no bank, banking association, trust company, cor
poration, association, firm, partnership, or person engaged in the
anking, loan, building and loan, brokerage, factorage, insurance,
indemnity, or trust business shall use the word "Federal", the words
nited States , or the word "reserve", or any combination of such
words, as a portion of its corporate, firm, or trade name or title or
oi the name under which it does business: Provided, however. That the
tni? section shall not apply to the Federal Reserve Board,
the Federal Farm Loan Board, the Federal Trade Commission, or any other
department,bureau or independent establishment of the G o v e r n m e n t of
states, nor to any Federal reserve bank, Federal land bank
or Federal reserve agent, nor to the Federal Advisory Council, nor
’
to any corporation organized under the laws of the United States,
-2-
X-4509-a
ncr to any bonk, banking association, trust company, corporation,
association, firm partnership, or person actually engaged in business
under such name or title prior to the passage of this Act.
ShC. 3. That no bank, banking association, or trust company
which is not a member of the Federal reserve system shall advertise
or represent in any way that it is a member of such system or publish
or display any sign, symbol, or advertisement reasonably calcul&tGd
to convey the impression that it is a member of such system.
S2C. 4. That any bank, banking association, trust company,
corporation, association, firm or partnership violating any of the
provisions of this Act shall bo guilty of a misdemeanor and shall
bo subject to a fine of not exceeding $1,000. Any person violating
any of the provisions of this Act, or any officer of any bank, banking
association, trust companyi corporation or association, or member
of any firm or partnership violating any of the provisions of this
Act who participates in, or knowingly acquiesces in, such violation
shall be guilty of a misdemeanor and shall be subject to a fine of
not exceeding $1,000 or imprisonment not exceeding oneyear, or both.
Any such illegal use of such word or words, or any combination of
such words, or any other violation of any of the provisions of this
Act, may be enjoined by the United States district court having
jurisdiction, at the instance of any United States district attorney,
any Federal land bank, joint-stock land bank, Federal reserve bank* .
or the Federal Farm Loan Board or the Federal Reserve Board.
SBC. 5. That if any clause, sentence, paragraph, or part of this
-A-ct shall for any reason be adjudged by any court of competent
jurisdiction to be invalid, such judgment shall not affect, impair
or invalidate the remainder of this Act, but shall be confined in its
operation to the cl&npp, sentence, -paragraph, or part thereof
directly involved in the controversy in which such judgment shall
have been rendered.
l'o rm -\ o .
A(
V ll.
Office Correspondence
To
"r -
Hamlin
From
Ipn-
Smead
______________
___
FEDERAL RESERVE
BOARD
*
Date
A p r i l - 15 f 1926 .
Subject:
____ :
_____
_________________________
,7ith reference to your memorandum of April 14, with which you enclosed
a copy of your confidential letter to Mr. Yrooman, and asked if during the period
of declining prices in 1920 the System "bought many Government securities, I beg
to advise that the index of wholesale prices in the United States reached its
peak, 247, in Pay 1920, and then declined each month until July 1921, v/hen it
stood at 141.‘ During this period the System’s holdings of United States
securities remained fairly stable, the average daily holdings by months being
as follows:
:.:ay
June
July
August
September
October
November
December
$302,000,000
348,000,000
518,000,000
303,000,000
339,000,000
304,000,000
320,000,000
339,000,000
1921 - January
February
March
April
liay
June
July
$298,000,000
287,000,000
296,000,000
277,000,000
303,000,000
302,000,000
261,000,000
luring the above period the earning assets of the Federal Reserve
System were relatively high and open market operations played but a small part
in the System's credit policy. The average daily holdings of total earning
assets of the System were :3,256,000,000 in Pay 1920, and fluctuated between
;3,201,000,000 and ->3,390,000,000 during the remainder of 1920, then began to
decline, reaching $2,013,000,000 in July 1921 at the time the v/holesale price
index was approaching the low post-war point.
//hen member banks are heavily in debt to the Federal reserve banks,
as they were during all of this period,.purchases and sales of Government
securities by the Federal reserve banks have but slight effect upon the volume
of Federal reserve bank credit in use for the reason that v/hen the Federal reserve
banks buy securities the funds thus paid out are returned to liquidate borrowings
at the reserve banks, and when the reserve banks sell securities the member banks
have to increase their borrowings at the Federal reserve banks in order to supply
the funds with which to pay for the securities. In times like the present,
however, v/hen the earning assets of the System are on a relatively low level,
and especially at times v/hen borrowings of banks in Pew York Gity, the central
money market, are fluctuating between 050,000,000 and 0100,000,000, purchases
and sales of Government securities have a very decided influence upon the credit
situation, as there is not at such times the same automatic adjustment in bor
rowings that takes :place v/hen the volume of Federal reserve bank credit in use
amounts to 02,000,000,000 or 03,000,000,000 as was the case in 1920 and 1921.
Page 68
Volume 159
rtwtiw w r w *
CONFIDENTIAL
PROPOSALS BY PROFESSOR 0. M. W. SPRAGUE
FOR
THE CONSIDERATION OF THE
ADVISORY C O M IT TEE
October 15, 1925.
Page 69
Volume 159
SECTION 5200.
REVISED STATUTES.
Suggested, changes are enclosed in "brackets.
Sec. 5200.
Th© total liabilities (other than those incurred under Section
24 of this title and under Section 13 of the Federal Reserve Act), to any
(national banking ) association
of any person, firm, company, or corporation for
money borrowed, including in the liabilities of a company or firm the liabilities
of the several members thereof, shall at no time exceed 10 per centum of the
capital stock of such association actually paid in and unimpaired, and 10 per
centum of its unimpaired surplus fund.
This limitation as to such liabilities
to such association shall be subject to tho following exceptions;
No change in the present statute other than the specific exclusion of real
estate loans, Investment securities, and acceptances.
(l)
Liabilities arising out of the discount (or purchase) of the following de
scribed paper shall be subject to no limitations based upon the amount of such
capital and surplus:
The phraseology of the Senate draft of the Melfeddon bill is followed here,
with the addition of definite provision to cover purchased paper. Much may be
said in favor of the policy embodied in recent legislation in a number of States,
notably New York and Mi&souri, limiting the total amount which may be lent to
any one interest rogardloss of tho form or nature of the obligation. Under the
New York law, banks in large cities nay not lend more than 25 per cent of capital
and surplus and other banks not more than 40 per cent. As it seems impracticable
to move for such a restriction in the national law, I sis suggesting in tho fol
lowing paragraphs a more careful definition of the varieties of bills of ex
change and of commercial paper that may bo taken without limit.
(«) Bills of exchange drawn in good faith against actually existing values;
(b) C^bjnercial or business paper (taken at or about the time of tho sale or de
livery of goods ), actually owned by tho person, firm, company, or corporation
negotiating tho same; (e) drafts and bills of exchange secured by shipping docu
ments conveying o*r securing title to goods shipped— (but providod that no such
drafts, bills of exchange, or commercial or business paper shall be included
v/ithin the meaning of this exception when both drawer and drawee, or both maker
2.
and payee are corporations and one such corporation is affiliated with or a
subsidiary of the other, i.e., if a majority of tho stock of one such corpora
tion is owned by the other or by the stockholders thereof).
^he purpose of the proposed changes is to exclude notes taken for past duo
accounts, and also at least some portion of bills of exchange and commercial and
business paper that are in substance nothing more than tho obligations of a
single interest.
&
(d) Demand obligations Ttfien secured by documents covering commodities in actual
process of shipment (wh«n such obligations are or have been discounted or pur.
chased for tho account of tho drawer or endorser).
,
The additional proviso here is designed to exclude the holding of accepted
demand obligations for an indefinite period of time by a bank, a practice which
involves making a straight unsecured loan to the borrower. It is possible, how
ever, that a short period of time, say ten days, may be proper in some instances
to meet the marketing requirements of cotton dealers in small towns.
(e) Bankers* acceptances of the kinds described in Section 13 of the Federal Re
serve Act.
(i ) u otes secured by not less than a like face amount of bonds, notes, or certifi
cates of the United States.)
A bank may purchase an unlimited amount of these securities.
Leans thus
^ P<3Sr t0 b° ^ n° lGSS satisfact0I*y investment. It is, therefore,
proposed that the present limitation to an additional 15 of capital and surplus
e removed. At the Treasury this might be regarded as an offset to the proposal
°ne R®aorve c«*mittee to subject government deposits to reservo requirements.
(2)
Liabilities arising out of the discount of the following described paper
shall bo subject to the following limitations based upon the amount of such
capital and surplus:
(«) Liabilities as surety, drawer, endorser, or guarantor, other than of
hills of exchange and comnercial and business paper excepted under (1) hereof
and excluding accommodation paper, having a maturity of not moro than six months,
where tho surety, drawer, endorser, or guarantor obtains a loan from or discounts
paper with or sells paper to any national hanking association, shall at no time
exceed 15 per centum of such capital and surplus in addition to such 10 per
centum of such capital and surplus (but provided further that such obligations
surety, drawer, endorser, or guarantor of any corporation a majority of the
stock of which is owned by any borrower shall be included as a part of the ag
gregate obligations of such borrower).
This paragraph does not appear in any form in the existing law, which im
poses no limitation whatever upon indiroct liabilities, altho under a ruling
of the Comptroller endorsements of accommodation are included within the 10 per
cent limitation. A definite exclusion of accommodation seems dosirablo, and I
venture alsc to suggest the elimination of guarantees of interrelated borrowers.
(b) Notes secured by shipping documents, warehouse receipts, or other such docu
ments convoying or securing title covering readily marketable non-perishable
staples when such property is fully covered by insurance and provided that the
market value of such staples is at no time less than 115 per centum of such ob
ligations shall be subject to a limitation of 15 per centum of such capital and
surplus in addition to such 10 per centum of such capital and surplus for a
period of not more than six months in any consecutive twelve months; and pro
vided further that obligations of this character shall be subject to a further
increase of limitation of 15 per centum of such capital and surplus in addition
to such 25 per centum of such capital and surplus for a poriod of not more than
three months in any consecutive twelve months.
The DtcThdden Bill as it passed the House lengthened the period from six to
ten months on loans secured by staples, but it was restored to six by the Senate
Committee. The House bill, also, contained provision for loans on staples up to
50 per cent of capital and surplus, requiring additional margins in a succession
of steps until for the final 5 per cent of a loan a 40 per cent margin was nec
essary. This extension of tho loan limit was eliminated in the Senate draft.
There is reason to believe that it will be brought forward again and with strong
backing. I, therefore, would suggest as a substitute a more liberal provision
than is contained in the present law, but for the relatively short period of
three months.
(c) Notes secured by documents conveying or securing title covering livestock
when the actual market value of such livestock is not less than 115 per centum
of the face amount of the notes secured by such documents when such livestock
4
are being prepared for market during the period of the loon and provided no part
of the total secomoGdation granted the borrower is unsecured shall be subject to
a limitation of 15 per centum of such capital and surplus in addition to such 10
per centum of such capital and surplus, but this exception shall not apply to the
obligations of any one borrower for more than six months in any consecutive twelve
months.
The present law includes livestock in the paragraph in which an additional 15
per cent loan is allowed for six months secured by insured staples. Insurance for
livestock is generally impracticable, and this restriction was eliminated in both
the House and the Senate bills, which contain separate livestock paragraphs. The
House bill further fails to retain the six months limitation which reappears in
the Senate draft. I have omitted the requirement that the margin of 15 per cont
be maintained at all times, and have inserted a provision designed to exclude
breeder and dairy leans. On the ground that livestock loans are less liquid than
those- secured by staples, a further provision is added requiring the entire loan
of the borrower to be on a secured basis.
» '
•
•
5.
MENILIENT TO SECTION 19 OF THE FEDERAL RESERVE ACT
The federal Reserve -Act following in this respect the National Banking Law
absolutely prohibits the making of any loan or the payment of dividends when re
serves are- deficient.
This is ono of those provisions in the National Banking Law
which tends to discredit the Statute because it imposes an absolute prohibition
under conditions which may naturally arise from time to time in any bank however
well managed.
This prohibition may also be supposed to bo in part due to the ex
cessive significance attached to the maintenance of rosorve ratios in this country.
It was a prohibition for which something might have been said at the time when each
bank was directly responsible for the maintenance of its own reserve.
Under ex
isting arrangements with the rosorve banks constantly supervising the situation
and imposing fines for failure to maintain reserves, it would appear entirely
proper and consistent with safety to remove this prohibition from the Statute.
An
alternative proposal, ono howovor difficult of administration, would permit banks
to continue to lend when reserves wore deficient for a period of some days or weeks
and then apply the prohibition until the required balance had been restored.,
I do
not think that the banking system would bo strengthened by this arrangement to an
extent sufficient to warrant undertaking to administer such a requirement.
jiMENIMEpjTS,, to THE NATIONAL B A ffilN S LAW DESIG N ED TO FU RNISH MO KB ADEQUATE
j&T&.H E&A K D IN G r THE CONDIT IO N OF TPIE BANKS THROUGH EXAMINATIONS
X.
All
obligations of every nature both direct and indirect arising out of the
sale, pledge, or hypothecation of any of its assets by a national banking associa
tion shall be definitely recorded upon its books at the time such assets are sold,
pledged, or hypothecated.
Fbr
each failure to comply with this requirement a
national banking association shall be subject to a fine of Five Hundred Dollars.
(Possibly the fine should be imposed upon bank officers rather than upon the bank.)
..
proposal is designed to cover the rather common practice of the assump° L ? blT tl0Sf h y h a n k 8 in an infomal fashion often in correspondence between
,
officials. Theso obligations frequently escape the notice of bank examiners
because they do not appear in any regular fashion in the records of the banks.
II.
Where an officer or director of a national banking association is an officer
or director of any other bank, banking association, trust company, securities com
pany, or investment company, and where in the judgment of the Comptroller of the
Currency the national banking association is related in management and operation in
such close degree with such other bank, banking association, trust company, secur
ities company or investment company, that the examination of the national bank fails
to disclose its true condition in the absence of detailed information regarding such
other related institutions, then such other bank, banking association, trust com
pany, securities company or investment company shall furnish the Comptroller of the
Currency with a copy of an examination simultaneously made by the State authorities
of such othor bank, banking association, trust company, securities company or in
vestment company, and upon failure so to do the officer or director shall be dis
qualified from further acting in such capacity, and in such cases the Comptroller
of the Currency, upon request, is authorized to furnish the State Supervisor of
Banking, or other similar officers, copies of such examination of the affiliated
7.
national bank.
tion !fio h a ^ X>^ \ i3vd0B^ened t0 S00Ur° adoquate infonnation regarding the situsDuring
l banks“~ln many respects the most dangerous type of branch banking
* r f arS a considorabla number of the chains have collated and &
of the
fal?^°t • e V
”h0rea national bank
i" a chain the exa
hack and forth w
* ^dicate its true position because of the shifting of assets
011 and forth between the various institutions in the group.
III.
That Section 5146 of the Eavisod Statutes of the United States, as amended, bo
amended by adding at the end thereof a new paragraph as follows:
It shall be unlawful for any national banking association to make a loan or
loans of more than Five Hundred Dollars, unless secured by readily marketable col
lateral, to any salaried officer of such association or to any corporation in which
such officer or any director of such banking association owns or controls a major
ity of the stock or is an officer or director, except upon submission to such as
sociation, as a condition precedent, of a financial statement from such officer or
from such corporation as the case may be.
violation of this provision shall dis
qualify any such officer or director and vacate his place.
furnish f i n a n n f a f ^ J 0 bs 9nt? rely reasonable to require that all directors should
it is h iAlv r i l M
r ?
*?en S9CUrine loans without marketable collateral but
s e e u L t l f I cc^en? rn
^ ^
l * ™ * 0 3 * 1 woald oxcite serious opposition and consalariP / n ^ 0
^
yself with the recommendation of financial statements from
s laried officers and for the corporations in which directors are interested.
MISCELLAflTEOUS ATVTENIMENTS
Sec. 5205.
Shorten the period allowed for payment of assessments in casos of
impaired capital from three months tc two months with a further provision authoris
ing the Comptroller of the Currency tc extend the period when in his judgment it
may bo doomed advisable.
See. 5146.
Last sentence.
Any director who ceases to be the owner of the re
quired number of shares of the stock (or who pledges or hypothecates the samo), or
I'
#
8
.
who becomes in any othor manner disqualified, shall thereby vacate his place.
This is a minor change, designed to cover an apparent oversight in the Act,
which fails to disqualify a director who pledges or hypothecates his stock.
ADDITIONAL SUCTION TO THE NATIONAL BANKING- LAW OR THE
FEDERAL RESERVE ACT
A Board is hereby created which shall be known as
Supervision.
the Special Beard of Bank
Said Board shall consist of the Governor of the Federal Reserve Board,
the Comptroller of the Currency, and the Under Secretary of the Treasury, who shall
receive no additional salary for their service on said Board.
The expenses of said
Board, if any, shall be paid by the Federal Resorvo Board out of the fund derived
from assessments against Federal resorve banks as provided in the Federal Reserve
Act.
Whenever any national bank or any officer or director thereof shall continue
to violate the law after his attention has been directed to such violation by the
Comptroller of the Currency, and whenever any national bank or the officers or di
rectors thereof shall ccntinute to engage in unsound or dangerous banking practices
which, in the opinion of the Comptroller of the Currency, will, if persisted in,
endanger the solvency of the bank or cause loss to depositors of the bank, the Comp
troller of the Currency shall report the facts to the Special Board of Bank Super
vision which shall issue an order requiring the officers and directors of said
bank who are guilty of such violations of law or unsound banking practices, or who
are responsible for such violations of lav/ or unsound banking practices on the part
of the bank, to appear before said Board and show causo why they shall not be sum
marily removed from office.
If such officers or directors shall fail to appear
before said Board at the time and place specified by said Board, or if they shall
appear and after a hoaring the said Board shall reach the conclusion that such of
ficers and directors have been guilty of such continued violations of the law or
such continued unsound practices, the said Board shall have discretionary author-
v
t.
■
t •
9.
ity, "by unanimous vote, to issue an ordor
and directors vacant.
Upon the issuance of such an order the offices of such of
ficers and diroctors shall be deemed to "bo vacated and such officers and directors
shall ho thereafter disqualified for a period of one year after the next annual
meeting of the shareholders of the bank.
The vacancies thus croatod shall be fill
ed in the same manner as any ether vacancies.
Note:
In order to moot the case of State member banks, it is suggested that a
Board of Supervision be established which shall be constituted in a somewhat dif
ferent manner.
This Board would be composed of the Governor of the Reserve Board,
the Reserve Agent of the reserve bank in the district in v/hich the State member is
established, and the Supervisor of Banks in the state whero the State member is
situated.
Certification of violations of law, or of unsound banking practice,
would in each case be made by the Federal Reserve Agent of the particular district
in which the State member
bank was situated.
7/
MEMORANDUM TO ACCOMPANY PE?CRT
OF FEDERAL RESERVE AGENTS COMMITTEE ON MEMBER BANK RESERVES
May 12, 1925/
Theory of Banking Reservess
The Observe of a bank consists of its uninvested funds
immediately available to meet its liabilities.
Banking experience in all periods
and all countries has demonstrated tsyond question the necessity for the maintenance
of.reserves by all institutions receiving deposits from others, especially where such
deposits may be withdrawn upon demand by the depositor#
The teachings of experi
ence are much less conclusive as no gIig proportion which sucn reserves should bear
/
.
to the liabilities which they support.
In the early days of banking, oanks in
many cases carried the entire amout of their deposit 3-iab.ili i-ies in ca.sh, charging
for servi.ee.
As the business of banking became better understood, it was demon
strated that a portion of the funds could be loanee and that all probable demand
x oi
payments in cash could be met provided a safe proportion of cash was held as reserve;
What such a proportion should be depends upon many factors including tne character
of the community which the bank serves, the character and activity of the deposits,
the likelihood of their withdrawal, the effect of seasonal or periodical demands for
cash which the bank has to meet, the likelihood of emergency requirements, and
finally eiid perhaps most important, the facilities which a bank has for replenishing
its cash reserve,
A bank which can rely upon prompt addition to its cash reserve
by obtaining a loan from a correspondent bank or a central oahx upon its own iomt
or investments can safely operate with a reserve relatively lower than would be re-
56 ?Hired by a bank not having such facilities available.
While the amount of reserve necessary to be held by an
individual bank is simply the amount needed to enable it promptly to meet demands
Page 71 -- Volume 159
or payment of its liabilities, when the problem of what constitutes adequate re•erves for all the banks of a country is considered, weight must bo given to o-ner
*
cnsiderations*
*
The reserves of banks in any one country must be sufficient in
mount to meet not only withdrawals of cash for domestic purposes but also demands
'or gold for export.
The reserves must also be large enough in proportion oO de
posit liabilities to safeguard in a measure the volume of credit extended by one
oanks.
Since neither of these considerations always appears compelling wnen con
sidered from the viewpoint of an individual bank, It becomes the particular duty oi
the legislative and supervisory authorities to give due weight to them in determining
"hat should be the aggregate reserves of a country's banking institutions.
Reasons for legally fixed reserves in the United States;
In most countries having highly developed and modern
banking systems, there is no legal requirement as to the amount of reserves which
* janks must carry against their liabilities.
The maintenance of a proper reserve is
•,he responsibility of the banks1 management,and tne general experience in the leading
countries has been that the responsibility in this particular has been well mot. Xn
countries other than the United States, however, banking development has led to the
“onsolidation of banks intc a small number of large banks with many branches, and with
experienced management, which might be depended upon to maintain adequate reserve
without direct legal requirement,
In the United States differing conditions have led to,
•j practically compelled the adoption of a pcV • ' of legally fixed reserve require
ments for all incorporated banking institutions accepting from the public deposits
avable on demand.
X'
It has been the disposition of the Federal Government and mo so
J
..f ^he State Governments to encourage or permit the establishment of independent
%
banking institutions of limited capital wherever such banks could operate and serve a
*
community.
Obviously with a large number of banks it cannot be expected that
) management
in
all
cases
will be comparable in experience
to
that
of
M
3.
the large banks typical of the leading bank ins systems elsewhere in the world.
Nor
ire the managers of these numerous small banks, however competent, in favorable
position to acquire the knowledge and appreciation of the national and international
aspects of the problem necessary for safe and satisfactory administration of the
nation's banking reserves without any prescribed reserve requirement*
Experience
of many years has clearly demonstrated that for our system of independent banks pre
scribed legal reserve requirements arc necessary and in the best interest of all con
cerned, for they protect not only the banks whoso management might otherwise be in
clined to court disaster by failure xc carry adequate reserves, but also give pro
tection to the well managed bank by lessoning the dangers of reckless competition
by poorly managed neighboring institutions*
The banking system of the United State:
.laving developed and our bankers having become thoroughly accustomed to operation
with legally fixed reserve requirements* it is believed that this method cannot be
departed from with safety at. the present time.
Liabilities against which reserve should be carried;
Liabilities, in whatever form, for money deposited and
subject to withdrawal by the depositors should be protected by reserves.
differing character require reserves of differing relative proportion*
Deposits of
A very im
portant distinction ha.s for years teen made between deposits subject to withdrawal
on demand, termed•demand deposits,
and those
for which notice of withdrawal must be given,
deposits.
not subject to withdrawal on demand or
and which are referred to astime,
The principle is generally accepJLhat time
maintenance of a reserve as large proportionately
deposits do not require
the
as that required against demand de
posits, but that a reasonable and proper reserve should se maintained against time
ieposits.
.
.
A distinction has also been made between demand de
posits received from banks and those received from individuals.
Students of banking
and writers on the subject have for many years recognized the need for higher re
serves against deposits frcm banks than against deposits from individuals.
Deposits
from banks are subject to wider ana raoro t’Qpi a fluctuations than are deposits from
individuals.
The former represent the reserves on the deposits of the bank which
has deposited them with the tank reporting then as bank deposits,
In the case of
deposits due to banks not members of che Federal Reserve System, rucn deposits are
j..egal reserve for the depositing bank*
Thus a bank which keeps a portion of its
reserves against demand deposits deposited with s&jthor bank will be obliged, in the
vent of withdrawals of funis by its own customers, to make withdrawals of about
^ike. amount from its depository correspondent bank, which withdrawals will constitute
a. relatively larger proportion of such redeposit.
The strain of withdrawals is thus
concentrated upon the bank which nolds the redeposited reserves of other banks and
it should be prepared to meet this strain.
The committee has sought xo ascertain by statistical means
whether the well established belief in the greater fluctuation of bank deposits is
justified by actual experience.
To this end experience of a considerable number of
banks, showing substantial amounts due to other banks, has been aborted (See Exhibit
A) •
The results indicate that bank deposits show greater fluctuations than do
demand deposits and that the difference in flucvuaxion is of moderate degree in the
case
of
banks in large centers having large amounts of bank deposits from large num
bers of individual banks, while in smaller centers bank deposits tend to show far
more violent fluctuations than do individual demand deposits in the same institutions
Reserves against bank deposits are at present unduly low
dn the case of banks outside of reserve and central reserve cities Miich have active.,
solicited such deposits in competition with banxs located in the cities formally r e v
cognized as reserve centers and therefore recuired to carry higher reserves.
Com
petition for deposits of other banks is not local in character but is statewide and
even nationwide.
All banks competing to obtain bank deposits should be upon a sub-
ijr -
M 5.
deposits.
The Committee therefore favors a minimum reserve requirement of 10
per cent, against bank deposits no matter where the bank holding them is located.
Reserve requirements for members of Fede~*al Reserve S ystem.:
The Federal Reserve Act as originally enacted provided for
the gradual elimination of deposits in banks other than a Fedora]. Reserve Bank from
the status of legaJi reserves.
In 1916 a committee of Federal reserve agents, of
which two members of the present committee were members, recommended that vault
cash should not be classified as legal reserve are that the aggregate reserve should
be reduced proportionately.
In 1917 this change was made by legislative enactment,
and a compensating reduction of 5 per cent, was made in the percentage of reserve
required against demand deposits and a similar reduction of
serve against time deposits.
2
per cent, in the re
Thus the only reserve required oy law to be held
by member banks is that carried with the Federal Reserve bank.
Experience has
shown that the banks can ooerate setisfactorily without a fixed requirement for cash
in vault and that each institution carries such amount as suits its particular
location end business.
A material economy in the
miount of idle vault cash has
been achieved with reduced expense and risk to the individual institutions and at
the same time concentration of reserve cash in the Federal Reserve banks has been
made possible.
The committee has had data assembled from banks in several
Federal Reserve Districts to show the amount of vault cash now carried and its ratio
to the banksf deposits.
These figures fvr.v.sh convincing evidence that the
elimination of the requirement has been of distinct advantage to the banks of these
districts in that it has permitted them to adjust the vault cash carried to meet
the needs of their individual requirements.
The redaction :.n vault cash which the
banks have actually made has been greater than the investigations made in 1916 and
1917 indicated as probable.
Following is a table showing the percenuages
of vault cash to net amount -of all deposits on which reserve s are computed on May 1,
■'-917 before adoption of the 1917 amendment and on October
10
, 1924.
A
•
•
Percentages of 7aul p Cash
To Net Amounts i
:.T all deposits on which Reserves are computed
anks in
May 1, 1917
N ew Y o rk Ci t y
October 10, 1924
Reduction
11.7
JL fi
.10.5
10,9
1.7
9.2
Other Federal Reserve Bank
and Branch Cities
7.1
2.0
5,0
Other Reserve Cities
7 ,2
3.9
3.3
Country Banks
6.9
3.6
3 .3
8.2
2.5
5.7
Chicago
Total United States
j
>______________________
The reduction in required reserve made in 1917 was in,
the case of most banks more than adequate to offset the discontinuance of counting
vault cash as part of the legal reserves.
It is believed that most of the country
banks now carrying vault cash in amount greater than 5 per cent* of their net de
posits can by the adoption of methods found p-
’.fcable by the majority of country
banks, reduce their vault cash sufficiently to come within that limit.
If for any
reason vault cash were again to be counted as part of the legal reserve, the total
reserve required by law should be proportionately increased.
The suggestion is
sometimes made that vault cash be deducted from deposits in determining the amount
against which reserve should be computed.
The following tabulation shows the effect
which would result from such deduction from demand deposits, with the present, re
serve percentages in effect.
EFFECT OF DEDUCTION OF CASH IN VAULT FROM GROSS DEMAND DEPOSITS (000 Qmitted)_.
i
i
Data from Reports of Condition
Banks in
* Pro
posed
Reserve
Require
ment
V
t
1
of
/#
Oct. 10, 1924
Sept, 14, 1923
Vault -Reduction i a le- <vauit
cash
1 serve requirement ’cash
held
’.amount ’Percentage ’‘held
*
i
;
$
*
§
;
%
Reduction in reserve
requirement
Percentage
* /mount
*
|
1
1
I
3
»
;
!
*
\ 63,027*
J
.. 4
8,194
-
2,807
-1 .7
,
New York City
1
13
57,424*
7,465*
- 1,4
Chicago
*
13
23,538*
3,060*
*
t
- 2.3
* 21,590’
T
••• t
Other Fed. Re's, 'Bk,t
and Branch Cixi es t
10
*114,528* 11,453*
*
- 2.2
*114,531’ 11,45a
i
,
-
10
46,320’ 4,632’
i
- 4.2
* 46,397’
t
,
4,640
- 3.9
an?..,344'. IS,. 764
-■——
3,8..
— •
»
t
- 2.5 *527,889’ 46,858
- 3 06
Outside Reserve
Cities
*
t
Country Banks
'
i
«
Total
U. S«
7
PRT RQ ri » 19.712’
1
523.407' 46,322’
1.2
2
S0
- 2.2
The elimination of the deduction of balances due from ooher
banks whether from the deposits due to other banks as at present permitted or from
gross deposits would be favored by the committee, we re it not that such a change would
result in violent increases for individual ba-. .
The reserve of the member bank required by law to be
carried with the Federal Reserve bank serves to replenish the member bank s vault Ccxshj
to meet clearing house balances and other daily demands, to meet seasonal or emergency
withdrawals, and to contribute to a central reserve fund which will furnish the basis
for rediscount accommodation at the Federal Reserve bank, and at uhe same time safeuard the volume of credit expansion.
3o
Secured deposits.
Secured deposits should be, and in many
states are, subject to reserve requirements.
Security intended to insure ultimate
liquidation does not relieve the bank from the necessity of paying out cash •"•hen
a deposit is withdrawn.
A test of need for reserve.
The committee has had exuensiv^.
studies made of the velocity of turnover of deposits, that is, the mount of checks
paid by a bank during e period in relation to the amount of its deposits.
-ih^oC
studies disclosed such extreme variations as c.ieavly to indicate thao velocxoy of
turnover is not a reliable test of the need for reserve against deposits.
Velocity
of turnover indicates activity but not necessarily likelihood of withdrawal, which
is ohe obvious test of reserve needs.
See Exhi oit A for illustration of fluctu
ation in deposits).,
Classification of Deposits.
For reserve purposes, deposits should
be divided into three classesi bank deposits^, demand deposits and uime deposits.
Other liabilities not subject to reserves with Federal reserve banks should include
national bank notes which carry reserve in form oi the 5 per cent, redemption fund
at Washington and all other liabilities not subject to reserve ci ar.y description*)
Deposits and other liabilities are listed in detail below, with the present reserve
practice indicated and also that recommended by the committee.
Items 25 - 30 in
clude certain assets which pertain to reserves.
1.
Balances due to bank, banter and
trust companies in
States
and foreign countries;.
2.
Certified and cashier’s checks
3.
Individual deposits subject to check
4.
Certificates of deposit due in less
than 30 days
Present P,e serve
Practice__
Committee’s
Re common d at i on
Demand deposit
rate on balances
remaining after
deductions.
Bank
deposit
rate on net
balances.
I!
Demand deposit rate
ii
Demand deposit ra*1
u
it
Present Reserve
Practice
5.
6
.
7.
8
.
9.
State, country or other municipal
deposits, secured by pledge of
assets of the bank or Surety bond,
requiring less than 30 days notice
Demand deposit rate.
Committee’s
Recommendation
Demand deposit rat
»
Deposits requiring notice but less
than 30 days
It
ii
Other demand deposits
?l
ii
Uninvested trust funds deposited in
commercial department and payable
within thirty days
i;
17
Dividends unpaid
10. U. S. deposits (other than postal
savings deposits) including war loan
deposit account and deposits cf U.Sr,
disbursing officers
11. Cash letters of credit and travellers'5
checks.
12, Postal Savings deposits
None
«
Time deposit rate
15. Other time deposits
16o Circulating notes outstanding
17. United States Government securities
borrowed
18. Bonds and securities other than
United States borrowed
19. Bills payable
20. Notes and bills rediscounted includ
ing acceptances of other banks and
foreign bills of exchange or drafts
sold for endorsement of this bank
21, Acceptances executed by this bank
less acceptances of this bank
purchased or discounted
:i
Time deposit rate
ii
13. Certificates of deposit payable
after 30 days
14. State, country or other municipal
deposits secured by pledge of
assets of the bank or surety
bond requiring at least 30 days
written notice of withdrawal
It
n
ii
IV
i?
5Jo Redemption Fund
None
5/o Redemption Fun
None
it
ii
i:
71
it
II
it
II
u ic
Present Reserve
Practice
Committee*
Recommendation
j
22.
Acceptances executed by other '
banks for account of this batik
23.
Capital stock, surplus and undi/.idad
profits
r
if
Other liabilities
if
n
•
2 $
,
Balances due from national aud stale
banks, ttehkers and T r u s t companies
in United States
26 •
Balances due from foreign banks
27,
Checks in process oi collection with
Federal Reserve bank (or other banks).
r o
CO
25.
Le cu cti bl e f rom
banx deposits
only.
Not deductible
Exchanges for clearing house
Checks on other banks in same place
c o
Cash in vaults
o
29.
Bank deposits.
None
None
Deductible from
bank deposits
only.
Not deductible
Deductible from
Deductible from
bank deposits only.gro&s demand
deposits only.
tr
M
ti
it
Not deductible
Not deductible
In the classification of bank deposits should
be included balances due to all incorporated bai’-'S.or private bankers which them
selves receive deposits from customers.
.
This would include all balances due to
National banks
State banks and trust companies
Federal Reserve banks
Foreign baifes
Mutual savings banks
In addition, it should also include the following Oi similar institutions if they
receive deposits from customers repayable upon demand or short notice.
If they do
not receive such deposits, or if the deposits are not subject to withdrawal upon
demand or short notice, balances due them should be included among demand deposits:
«
P ri v at e bank e rs
Acceptance corporations
Building and loan associations
Cooperative banks
Credit unions
Federal Farm Loan banks
Joint Stock Land banks
Intermediate Credit banks.
J
W 11
Classification of banks as to reserve requirements:
The practice of classifying banks
according to
location in fixing the reserve requirement of each bank has been followed in the casof the national banks for sixty yea^s and is so thoroughly a part of the banking
practice of our country that a change is not to be thought of except for compelling
reasons •
In the course of :i-3 studies of the reserve problem,
the Coirmittee has tested various proposals for changes' in the method of computing
member bank reserves and the percentages of reserve required.
In order to examine
the effect of such changes- over- thirty different formulae were developed and applied
.
\
' *
to the aggregate figures of the several groups of member banks.
The formulae which
appeared practicable when applied to total figures were tested also with the figures
of 2,543 individual member banks selected from all twelve Federal Reserve districts
and representative of banks of all sizes.
It was found that most of the formulae
studied, even though making slight che»gein the aggregate reserves of the member
banks, would cause material changes in the reserves of many individual banks.
ihe
committee has reached the conclusion that the formula sot forth in the report which
this memorandum accompanies is the most satisfactory one which has oeen developed.
REPORT OF
RESERVE AGENTS COMMITTEE ON MEMBER BANK IffiSSRVES
TO THE FSEERAL RESERVE BOARD
May 12, 1925
Page 75
Volume 159
#
report
of f e de r a l r e s e r v e
agents
committee
on m e m b e r
bank reserves
TO THE FEDERAL RESERVE BOARD
May 12, 1925.
At the joint conference of the Federal Reserve Board, the
Federal Reserve bank governors, and the Federal Reserve agents, held in Washington
in November 1924, the Federal Reserve Agents Committee on member bank reserves, con
sisting of Frederic H, Curtiss, Chairman, Pierre Jay and William ^cC. Martin, which
had been engaged in studying the subject, was reappointed, and D. C. Wills added to
the committee.
The committee has had extensive studies made on the subject of
member bank reserves and has held several meetings, at which the results of these
studies and the general problems of member bank reserves were thoroughly discussed.
It is the view of the committee that a change in the aggregate reserves carried by
member banks should be avoided if possible.
The credit system of the country has
become adjusted to the present level of reserves and any material change therein
would involve readjustments, the effect of which it us difficult to forecast-
It is
also desirable to avoid changes in'reserve requirements which would bring about vio
lent changes in the reserves of individual barks.
The committee would, therefore,
prefer to avoid any change in the present requirement.
It recognizes, however,
that in certain particulars changes are desirable and recommends that the require-
i
ments of the Federal Reserve Act relative to member bank reserves be so changed a!s
;o:
1. Permit the deduction from demand deposits of (a) exchanges
for clearing house, (b) checks on other banks in the same place and (c)
checks in process of collection (whether with Federal Reserve banks or
correspondent banks) according to Federal Reserve schedule of time required
for collection of checks.2
2.
Retain the present provision of the law that "the net dif
ference of amounts due to and from other banks" shall be taken as the basis
of ascertaining the net amount of balances due to banks.
2.
3.
Provide that the reserve required to be held against
net- balances due to banks be 10 per cent# for all member banks
except those in New York City and Cnicago, This involves an in
crease from the present requirement of 7 per cent, for country
banks.
4,
Provide that reserve shall be carried against govern
ment deposits at the same rate as against demand deposits.
With the proposed amendment in effect, the amount of de~
osits subject to reserve would be computed b2r the following formulas
3ank deposits
la
2.
(A) 3.
_
Balances due !._• banks, bankers and
trust companies m United States
and foreign countries
Deducts
Balances due from banks (other than
Federal Reserve Bank) in the U.S.
Net balances due to banks (item 1
minus Item 2)ff
§
$
Demand deposits
4#
5*
6.
7.
8.
Demand deposits
,
Cashiers1 arid certified checks
U, S. Government deposits
Cash letters of credit and travellers*
checks
'' _
GROSS DEMAND DEPOSITS (Exclo bans
deposits (items 4,5,6 and 7)
;
Deduct;
Checks in process of collection with
- Federal Reserve pr correspondent
banks according to Federal Reserve
time schedule
10. Exchanges for Clearing House
11. Checks on other banks in same place
12.
TOTAL DEDUCTIONS (items 9,10 and 11 ) ""
9.
(B) ) 13•
. „
NET DEMAND DEPOSITS (Excl. bank
deposits (item 8 minus Item 12)
(over)
3
.
Time Deposits;
14
.
Savings accounts (subject to not less $
than 30 days notice)
15 . Certificates of deposit (subject to
not less than 30 days notice)
16. Postel savings deposits
17. Other deposits payable only after
30 days
*
18,
TOTAL TIMS DEPOSITS (Items 14,15„
15 ana 17)
(C)
A
9.
m
7f
Should the aggregate "due from banks" (item 2) exceed
the aggregate ‘'due to banks" (item l), both items must be omitted
from the calculation.
Re qui re d Re se rv s s $
[A )
13% I n Lev/ York and Chicago; 10% elsewhere*
\B)
13/o "
(C)
3/o wherever located.
"
"
"
. 10^ in other Reserve cities; 7% elsewhere
Figures are given below showing the estimated effect of
'me proposed changes in reserve requirements based upon the reports of condition of
ember banks on two dates , September 14 ? 1923 and. October 10, 1924 3 and with the
:allowing reserve percentages.
w et
Bank
Deposits
New Fork City
Chicago
;ther Fed.Res. Bank <3b Branch Bank Cities
Outside Reserve Cities
Country Banks
13
13
10
10
10
Net
Demand
Deposits
13
13
10
10
7
Time
Deoo si
3
3
3
3
4.
Effect of Proposed Changes in Reserve Requirements
(000
Omitted}
As of September 14. 1923:
Present
Required
Reserve
.
New York City
$ *546.015
Chicago
133,189
Other F.R.B. -&
Br. Cities
51.5,322
Outside Re
serve Cities
111,476
Country Banks
.524,201
Total U . 3, 41,430,203
Increase
Reserve on Reserve
Change by
Increase
Bank dewith
Deduction
posits of Proposed
of
Reserve on
CounChanges
Uncoils cted
Government
try
EfNet
%
------r
- ■■■( _ _Decosits % sanies
:ective Change Chge.
$~ 4,427
- 1,007
- *S $4 3,259 4.6
-
.8
4
0
ii 544,847$-! ,168 ~,2
644 +.5
0
132,826 -
363 -.3
-10,365
-2 . 0
4 6,828 41.3
0
511,784 -3,538 -.7
- 2,908
-2 , 6
4 1,405+1,3
0
109,973 -1,503 -l.Ss
-24.038
-4 >6
+ 2.249 -j-,4 42, OOCJf
0-42,746
r2 . 3 $414,385 + ,8 +2,000
504.412 -19.739 -3-8
fi$1 ,3 0 3 ,842$-26,3 61 -1 .£
As of Cctober 10* 19 24?
New York City
$
6 8 8 3060
2,629
«
4
$4 5,675
4,3
0 $
691,106 $4 3,046 4.4-
Chicago
163,122
-
321
- .2
4 1 ,357 4.8
0
154,158
4 1,036 4.6
Other F.R.B.&
Br. Cities
574,467
-23,935
—4 *2
417,82743.1
0
568,359
- 6,108-1.i
Outside Re
serve Cities
120,336
- 1,305
-1,1
4 1,393 4l»2
0
120,424
4
Country Banks
542,948
-24,346 _-4.5
524,488
-18,460-3
Total U.S.
$2,083,933 $-52,536
$
-2U6
-- A rough approximation
4 3,886 4,7 42,00Off
88 4,1
$430,138 41 o4 42J00C#|2. 068,535 1-20,398-1.*
...
•
•
-
This formula has also been applied to 2,543 individual banks, so selected as to
representative of conditions existing in each Federal Reserve District. A summary
of the resulting changes in the reserve requirements of these banks appears on the
following page*
EFFECT OF FORMULA PROPOSED BY FEDERAL RESERVE AGENTS • COLM TTEE FOR RESERVES OF MEMBER BANKS
ON 2 5 4 3 SELECTED BANKS AS OF OCTOBER 1 0 , 1 9 2 4 .
♦Boston
424 Banks
Per cent
Change
Eero
New York
182 Banks
27
P h iladelphia
213 Banks
8
17
_
♦
38
59
68
58
____ 53
----------- 6
f --------15
7
4
8
3
9
10
2
11
12
13
14
26
20
10
12
15
1
3
3
4
1
1
2
3
4
1
Cleveland
177 Banks
-
+
-
26
29
40
19
8
8
11
8
5
3
2
22
31
44
36
20
5
6
3
2
1
1
2
1
1
12
♦
-
2
6
6
4
1
18
18
39
32
22
8
1
2
3
2
3
10
29
38
16
8
9
2
3
2
7
6
4
1
3
1
3
1
X
''
3
---------
15
----------_
-
1
1
1
♦
Richmond
172 Banks
Atlanta
151 Banks
.
4
5
3
3
2
2
2
2
1
4
2
2
♦
10
7
5
3
2
*
1
‘
\
1
1
1
3
135
171
i
♦
19
31
31
21
9
2
r
-
7
3
3
1
20
12
35
42
20
8
6
3
*
4
i
2
1
1
1
1
5
3
2
1
2
1
1
15
12
11
24
18
15
5
1
2
1
1
1
121
115
27
,
1
3
322
30
1
53
1
117
1
114
2
1
24
34
♦
-
6
6
1
4
20
23
18
38
20
5
1
16
1
3
4
2
3
183
♦
-
2
3
2
1
1
1
1
1
1
1
1
1
j
103
16
147
34
♦
233
84
346
78
449
47
411
44
253
34
121 > 25
46
21
29
17
18
14
8
12
8
5
2
9
3
3
8
A
1
148
A ll Districts
2543 Banks
15
1
1
2
2
1
1
1
1
1
2
San Francisco
176 Banks
8
♦
X
138
34
22
24
24
9
4
4
1
4
1
4
2
3
2
1
-
D allas
145 Banks
14
v
!
♦
Kansas City
178 Banks
Minneapolis
173 Banks
1
2
30
13
1
56
♦As o f September 1 4 , 1923
16
8
4
4
3
1
4
1
26
70
76
73
38
22
8
2
1
1
97
-
1
1
300
♦
.
5
4
3
1
•
18
19
20
Over 20
Total*
Total*
10
-
,
19
27
28
13
'
1
St. Louis
151 Banks
26
6
-
♦
Chicago
401 Banks
14
2
1
4
4
1
4
--------- 1
&-------- 79
1
1
1,931
429
.
•
-
•
6,
Deduction of Checks in Process of Collection:
The deduction of exchanges for clearing house,
checks on other banks in the same place and other checks in process of collection
prom demand deposits instead of from "due to banks" is proposed in order to correct
■■he unequal bearing of the present requirement on different banks.
The difficulty
’-is been that while baks holding deposits of other banks could, under the present
lav/, deduct checks in process of collection from the amounts due to banks an com
puting the net amount against which reserve is to be carried, banks not having bal
ances due to banks could not avail themselves of this deduction.
it is believed
that the deduction of checks in process of collection should be available to all mem
ber banks alike, for the reason that it is the general practice of banks in the
united States while giving immediate credit for such checks deposited with them, to
assert and maintain the right to refuse to pay against such checks until they are
actually collected.
Thus a portion of the bChkb'deposit liability is deferred un
til the checks which created it actually have been collected.
Moreover, the volume
of"checks on other banks” suffices to offset like amounts of checks which may be out
standing against the bank in question when exchanges are made through the clearing
house or through other banks.
Suggestion has at times been made that no deduction of
any kind should be permitted from gross deposits and that the percentage of reserve
should be reduced to compensate.
Study of the deposits of individual banks clearly
rhows that great fluctuations take place in J..
mount of checks on other banks held
from day to day which are offset by fluctuations in checks drawn against them, and
which, therefore, do not produce corresponding fluctuations in the net deposits of
the banks.
The allowance of the deductions referred to is therefore believed to be
equitable for the reason that thereby fluctuations in amount of reserve required will
be minimized.
7
.
The deduction of these items, representing checks in process
of collection, should be made from demand deposits for it is through the demand
deposit accounts that most of the checks are received*
10 Per cent. Minimum Reserve Requirenent on Bank Balances*
The recommendation of the committee that in no member bank
shall a reserve of less than 10 per cent, be carried against net balances due to
banks, is based upon two considerations;
(l)
that the National Banking Act has always recognized that
banks in cities authorized to hold the reserves of other banks should
be required to carry higher reserves than banks in cities not so
authorized.
This is the requirsment also under the laws of some of
the states, while under laws of other states banks which wish to hold
the reserves of other banks in the state are required to carry higher
reserves*
A bank which keeps a portion of its reserves deposited
with another tank will be obliged, in the eventof withdrawals of
funds by its own customers, to make withdrawals of about like amount
from its depository correspondent bank, which withdrawals will con
stitute a relative?.y larger proportion of such redeposit.
The strain
of withdrawals is thus concentrated upon the bank which holds the reredeposited reserves of other banks and it should be prepared to meet
this strain*
(2)
that balances 5,due to r^nks" are found by the committee,
after investigating the experience of 315 banks in seven Federal Re
serve districts, to fluctuate much more widely than other demand de
bank
posits; also that the smaller the number of out-of-town accounts held
by a bank the more widely does the balance "due to banks" fluctuate.
(See Exhibit A)
3.
The committee feels that where a bank not in a central
ror.erve or a reserve city undertakes to solicit the accounts of other banks in its
territory or in more distant places, particularly the balances of nonmember banks
whose logal reserves are among its deposits, the protection of the bank itself as
veil as the protection of the communities whose banking reserves it holds, justi’ios the committee in recommending that such a can* , with respect to balances due
to other banks, should be placed at least on an equal lo'.’ting, as to reserve re
quirements, with banks in those cities, other than New lork and Chicago, which the
law now designates as reserve cities.
Reserves against balances due to banks are
'
at present unduly low in the case of banks outside of reserve and central reserve
cities, many of which have actively solicited such deposits in competition with
banks located in the cities recognized as reserve centers and therefore required
carry higher reserves.
to
Competition for deposits of other banks is not local in
character but is statewide and even nationwide.
The change of from 7 per cent, to 10 per cent, on net
balances due to banks docs not seriously affect the figures of many individual
banks.
The change recommended affects only a small number of country banks which
are actively seeking to become reserve centers for large numbers of banks in their
respective territories.
_».n most of the other cases of country banks holding out-
of-town bank accounts the balances "due from banks" substantially offset the bal
ances "due to banksV
The aggregate change is estimated to be less than ^2,000,000.
Reserve on Government Deposits;
Government deposits are subject to withdrawal even
more promptly and certainly than other deposits and should be subject to the reserve
required against other demand deposits.
Before the passage of the First Liberty
Loan Act in 1917 government deposits payable on demand (not including postal savings
deposits) were subject to the same reserve requirements as other classes of demand
deposits.
At that time in order to facilitate government war financing, the re-
9.
quirement of reserve against government deposits (other than postal savings deposits,,
was removed.
The exigencies of war time financing now having passes, the Committee
believes that reserves should again be required against all classes of government
deposits.
The effect of this change upon the required reserves of the banks would
be as shown below.
.
CFFECT OF REQUIRING RESERVE ON GOVERNMENT DEPOSITS
ACCORDING TO PROPOSED FORMULA
Condition Rnoorts
*
1Sept. 11,
f0
s
Bank s in
Cnange
*Required*
1
*/mount_______•.__ 4
New York C i t y
5
Chicago
’
Other F e d .R e s ,o k *and Br. C i t i e s *
Out s id e Re s o r v c C i t ie s
Country Banks
t
T o t a l U n it e d S t a t e s
*
1923
13
13
10
10
7
1
'i? 3 ,2 5 9 , 0 0 0
i
i
i
6 4 4 ,0 0 0
6 ,3 2 8 ,0 0 0
1 ,4 0 5 ,0 0 0
2..249 .000
i
t
i 1 4 , 3 8 5 . 0C0
Oct. 10. 1924
Change
Amount,
&
.6
.5
1 .3
1 .3
.4
$ 5,675,000
1.357.000
17,827,000
1.393.000
__ 3^886,000
*8
30r138.000
.3
,8
3.1
1.2
...__ EZ..
1.4
Adjusted credit and debtt£_t o_member banks for currency_shi^ents.
The ccimnitteo does not favor the practice of the
Federal Reserve banks’ deferring charges in member banks' reserve accounts for ship
ments of currency to member banks until sufficient time has elapsed ior such ohip
ments to arrive, nor of allowing credit for shipments from the banks as of xhe date
on which the shipments were made.
The dif*i once in reserve requiiements of c
try banks as compared with the requirements for banks located in Federal Reserve
bank and branch btf*cities should adequately meet the purpose of compensating the
out-of-town bank for its relative inconvenience in obtaining currency.
An arrange
ment whereby charges for outgoing shipments might be deferred but incoming shipments
not credited until receipt, would appear to be the maximum concession which should b
10«
'■allowed in this matter, and the fact that the size and destination of outgoing ship«
i9 nts are known to the Federal Reserve banks and therefore might be logically con*-.
sidered as a part of the member bankts reserve until received by the member bank
would give a measure of propriety to such a practice,
Gn the other hand, even
though currency sent by the member banks to the Federal Reserve banks is not actually
credited in advance of receipt, the effect on the amount of reserve carried is the
same as if the currency were actually credited before receipt and this is a radical
departure from established banking custom.
The practice might afiord encouragemen
to unnecessary shipments to the Reserve banks and to involve a disregard of the
possibilities of loss from delay or shortage in shipments.
Moreover, it results in
a further reduction of reserve requirements already moderate in relation to tnose of
banks in Federal Reserve bank and branch cities*
The Committee, therefore, recom
mends that if and when the proposed deduction from demand deposits of checks in pro
cess of collection becomes effective, the practice cf adjusting credits and debits
to member banks for currency shipments be discontinued..
Currency Depots;
•
The Committee do'ubts the expediency of establishing
currency depbts, and recommends that where such depots are or may be es'caolished the
reserve requirements of the member banks in the currency depot city be increased to
the equivalent of the requirements for member banks in Federal Reserve -uank or
Branch cities (other
than New York Citv and Chicago)*
'
*
Classification of outlying districts of reserve or c en t ral_reservilities:
The Committee believes that the presumption should b
against granting reductions of reserve for outlying sections within municipal limits
of central reserve or reserve cities.
There are cases where such reduction is just.*,
fiable, and such cases should be determined upon an investigation of the character c.
the individual bank or banks making application for reduced reserves.
11,
Segregation of savings deposits;
The Committee believes that the tremendous growth
which has taken place in time and savings deposits of member banks raised the pro
blem of protection of savings depositors by the setting apart or segregation of the
assets in which such deposits are invested*
The experience in states having laws
providing for the segregation of savings deposits has been satisfactory and deposi
tors in savings departments have thus avoided loss on many occasions>
In the ab
sence of provision for segregation of savings deposits., the development of a run on
a weak bank is very likely to result in the prompt withdrawal through the clearing
house or mail of large amounts of demand deposits while savings depositors are by
the application of the requirement for 30 days notice of withdrawal or by the
physical difficulty of presentation of pass book at the counter, prevented from par
ticipating in the withdrawal of the funds representing the liquid portion of the
bank's assets*
The segregation of the assets representing savings deposits would
not necessarily be accompanied by legal restriction as to the investment of the
funds.
The Committee suggests that this subject be referred to the Committee on
Legislative matters for its consideration.
Reserve against time and savings deposits*
Members of the Committee have from time to time re
ceived suggestions that inasmuch as many states have no requirement for legal re
serve against time deposits, the requirement of the Federal Reserve Act for 3 per
cent, reserve against time deposits should be reduced or eliminated.
is not in sympathy with this proposal.
The Committee
The reserve against time deposits should
not be lower than 3 per cent, and the Committee believes that the states should be
urged to adopt an equivalent requirement, and suggests that this also be referred to
the Committee on legislative matters.
The Committee has given careful consideration
to the Federal Reserve regulations regarding time deposits and believes that they
are adequate
12 .
Enabling Acts in States:
The Committee believes that ©fior-fca should be conoinued to have all states adopt legislation author!sing the substitution m
the case
of member banks, of Federal Reserve Act requirements relative to reserve for those
jf
the State la.w*
Restrictions concerning loons and dividends when reserve is defic-en ^.
While Section 19 of the Federal Reserve Act authorizes
a member bank to withdraw its reserve balance, it also provides that no bank shall
at any time make new loans or pay any dividends unless and until the balance re
quired by law is fully restored.
Exercising its statutory authority the Federal Re.,
serve Board has fixed penalties only for average deficiencies over weekly periods for
Reserve city banks and semi-monthly periods for country banks.
As a result of these
provisions, a member bank may withdraw its balances below the legal reserve minimum
provided the average reserve for the specified period is at or above the minimum,
without being subjected to penalty.
3ut while the penalty for deficient reserve may
not attach in such a case, the restriction against making new loans or paying divi
dends is operative whenever the reserve is below the amount required by law.
Th
Committee believes that the Federal Reserve Act should be amended to make this pro
vision less onerous and suggests that the subject be referred to the Committee on
.legislative matters.
Survey of reserve principles and pracoicej_
A supplementary memorandum on the general subject of
bank reserves accompanies th is report m which comment i s made on the princip
volved and the re su lts of in vestigation s made by the Committee are desenoed.
13
Conclusion %
The Committee believes that changes proposed
in the foregoing report will eliminate all serious inequalities in the
present method of reserve computation with only a slight reduction in the
aggregate amount of reserves carried by member banks.
The major
portion of this reduction would be in the reserves of the country banks.
Respectfully submitted:
FREDERIC H. CURTISS, Chairman
PIERRE JAY
WILLIAM MeC. MARTIN
D. C. WILLS
BALANCES
DUE
INDIVIDUAL
DEM AND
BANK AND DEMAND DEPOSITS
TO
R 48
BANKS
IN
F ED E R A L
CI92I-I924
iT N A T
</e. tom/n
S O M E R V ILL E
DISTRICT
AV E RA GE = 10 0 )
FIRST
SECOND
NAT. Poston
RESERVE
R O C K V IL L E N A T . i f e f ^ , / ^ Q)„,,THQM A S T O N
NAT. B o s t o n
N
IL L IA M 5 T O W N
WATERBURY
NAT.
Mass F IR S T NAT, of E A S T O N M
G E O R G E T O W N NAT.
N A T .W
is T o r C t .
NAT.
RN NAT.
JL3.2JL:_19.2.JL..jL2Z.
F I R S T NAT. G R A l i l T E ^
05ftt
CANA
CITY
P O R T L A N D N A T pt>r r.
L IN
NAT.
>2/ ' 1922 I 192.3 \ /924
T E R NAT.
NAT.
AT. E X C H A N G E
V TO rtht
R U T L A N D CO.NAT.
P R O V ID E N C E N A T F ro
iBaara
FEDERAL
RESERVE
BANK OF B O S T O N
FINANCIAL S T A T I S T I C S
DIVISIO N
NAT.
------BALANCES
DUE TO BANKS
-----------INDIVIDUAL DENAro DEPOSITS
BANK
AND
INDEX FOR® BANKS IN FEDERAL
DEMAND) DEPOSITS
RESERVE
JlSTR IC T 3
(1921-1)924 AVERAGE =100)
FEDERAL RESERVE BANK OF PHILADELPHIA
FINANCIAL STATISTICS
DIVISION
» W A L RESERVE
Ol* CLEVELAND
BANK
BALANCES DUE
——
—
—
INDIVIDUAL
BANK AND DEMAND DEPOSITS
TO BANKS
DEMAND
INDEX FOR 48 BANKS IN FEDERAL RESERVE DISTRICT 4
DEPOSITS
0 9 2 1 -1 9 2 4
ttA T IO fU L
C IT Y i
—
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l*J
A SH LAN D .
BUTLER
160
COUNTY
—
F IR S T
BUTLER
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.
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1411
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1411
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1414
SANK OF PITTSBURGH —
P IT T SBURGH, P A .
‘411 | 1412
14X3 1424
O U Q U E S N E --------- j - P IT T S B U R G H .
m
190
i
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70
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160
P IT TS B U R G H .
1411
PA.
141.4
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160
—
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K E Y S T O N E ------- P
IT T SB U R G H .
M E L L O N ---------------- P IT T S B U R G H .
PA
F fc
KU I >4I.
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M O N O N G A H CLA —
14 1
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X
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P IT T S B U R G H . __ P A .
419
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j
— ------ P IT T S B U R G H
PA.
1419
1411
I4H
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___ 1
FARM ERS
— __ SPR IN GFIELD,
O.
1414
L A G O N D A --------------a P R lI T V 't E L D
1411
1411
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1411
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141}
— —
S T E U B E N V IL L E
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F I R S T ------------------ T O L E D O
1411
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----- --------- W A S H I N G T O N ,
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1411
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O
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l i l i l — ijfiH ir T ik
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70
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70 t t fc r x a :::
160
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i i
J l H
(fn A - r W j r
L
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\ 7
CLEVELAND ,
as
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t
Jill liffim liiJ
JtSL
\
1414
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—
[ 14(1 I 14XX
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linHITI iliiiiliiTlj
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7\
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1414
142 J
\M
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t: T > .:i ■ “'Y K * / 1
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\ i (ff!!::
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p
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C A N T OH.
AVERAG E
j§ l:
i
70
I11:
-
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1
~
lio
-
14
W r. m
160
r f f c
S T A T IS T IC S
DIVISIO N
i t
N A T IO N A L EXCHANGE— W H E E L IN G ,
1421
1411
I
. T f li
W. Y A .
N A T l B A UK OF W .Y A .- W H EELIN G
4l»
1114
W /A .
14X4
1411
160 -
14X1
1415
130\
7o
70
IS
> s
_45
J i: : : : ! ':
| ^
100- - j / *
v'
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p
•1. .1 y
:;N
__ ml
In A
1A
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1414
J
-r* i “ " L
PA.
#
•
Balances due to banks
Individual demand deposits
a n k
a n d
d e m a n d
d e p o s i t s
INDEX E 0 R 4 8 BANKS IN FEDERAL RESERVE DISTRICT 5
(1921-1924 AVERAGE = lOO)
Md Drov&Mech Nat. Boltinnc,
f f i T 1921
1 9 2 2 ^ 1 9 2 3 ' ic j? ]
Md Merchants Nut Baltimore
160 1921 1922 1923 1924
Md. Nut Union
160 1921
1922
Baltimore
1923 . 1924
Md Western Not. Baltimore
) 1921
1922
Md.Second Nat. Cumberland
160 1921
1923
_________________ 340_______
1922 1923
1924
Md. First Nat.
i6a 1921 1922
DC. Frank in Nat. Washi nqton
160 1921
1922
1923 1924
19 ;
).C. Riggs Not._W<fsh nqton
|i60( 1921
1922
19 33l 1924
‘d
J30u ___
1
100
70 i
WVa CharlestonNotCharleston
; 1^23
1924
J3a
133
A
\
- -"'j
*w V
N
J 7!
^------------ r
ioo
1
' 1
vv
V '-
ISO
I3C»
*
I
\
/\
/ l
V
1
Jzft____V
u
17
J
;
100
70
1
J; ...
1
If II
I|
__ lL
It 1
\V'f / K \ J /
.
\
\J
J30.
130
1
/“/l / V _% i
f H,/\
'’
109
1 /
13®_ _
1301 '
130.
J60 1921
^ f c a s t o n ia
1922 |92t 1924 '
'3?.
f
iy
ja l
Y
109
_jr
70
70
W.Va. Fir?
160 19211
160 1921
1922
1923
Norfolk
1924
I\
* \
i
.130
,1301
ton
/ll W
Va. Not. Exchange
Roanoke
160 1921 ' 1922 1923 1924~!
tMl
Va. Staunton Not.
1
4f
>
✓
L
ft
\7
\ /
V" j
A
V
\____ LJ
N.C. Nat BlLof
New' Be^n
A
/\J
1 \J
[
•
1923
\
IC .C itize n s Not. , D urham
1921
1922 /923 1924
1924
J
i
\
109 \
7ft
7n
Nat. Excham
160 1921 ; 1922 )923ji\lp24
S.C.Nat.LoandiExch. Columbig
70 V \ /
.4 r s
\ \
/ /
J
‘n ./
ff /
\.
!3(l
1
P
••1
A [/*'►
f
m
N.C. R r s t Nat.
/j
/1/1
\\ I
»
N.C. R rs t Nat.
160 1921
1922
D u rh a m
I924~j
1923
1 ____
iR o ckyM oui
/ #11
{ \- 1
\ \ f
m
\
1 j /T v I1 if/I \ 1J \
\ / ■***
\w
j
H
70
i
40.
J
160f 1 9 2 1
N.C.M ure! oison Nat. Wiln u n g ton
^ 0 1921
1922 I 1923 1 9 2 4
130
130
M i
.'Oft '
\J
“ t T
//
//
✓ /
V\\ / ]
\v /
1 A - ''
r
\
ll
\
:
TT
70
1
1924
i3a
/A
40
i
N.C.Commercial Nat. Raleigh
11924
.160
1952
|,oJ
L
•]
/N //VW
Richmond
1923
—A
70
l
1922
^1_S.
139
,
4l/\
/
1 A
l / \
\ / ^V ! f
V \\W
v\“
V
!
V
A /
/M
7 **
/ v
16d 1921
~\ r --------s
Stauntoi
160 I92l\ 71922
A
7ft
J \ \%/ t
Vo.Amenton Nat.
^ V
70
Y
V
1924
,1923
13d
>
.
•30
m
Portsmouth
13d_
\A
7924
70
Va. R r s t Not.
160 1921 1922
/l924
160 1921 1 1922 11923
1923 ' 1924
inqdon
i VA
• / '
40
ko
Vo. V ir g in ia Not.__Petersburg
Va. First Nat.
IMI I92i
1922
At
\/
70
160 1921 1T922
Parkersburq
1923
1924
1922
130 *4
ll
ll
»
199
lQaJil
1
T
130
\ #
J--- A i - 4 - A /
lflfl \ A A
Vo. N o rfo lk Nat.__
4 0 . ____ L______L_____ 1______ 1
N.(i.Comrr ercial Nat.High Point
160 1951
— 1922 1923 ' 1924
H ic k o n
1923
1922
70
100_____ ^
\------TT
\ V / o Of/
70 \ /
N.C. First Nat.
1922
160 1921
of Summers n inf on
1922 1923“T 1924
/ \/
40^
1
______
Va. P lanters No f. Ric im ond
160 1921 1922 i$23 1924
40
1924 .
40
____
Fairm on
1923
1924
W.Va.Nat.Bk of
100
4S_
Va. M erchants Nat. Richmond
M 1921 1922 1923 1924^
N.C.First Nat.
1922 ; 1923
.130.
dfl__
Va. R rs t Nat.
Richmond
160 1921 — 1922
1924
-------- — 1923 -----------1
--------- -i
Clarksburg
70
70
7ft / ^
J
.___
i.
70
70
V \
40
i
Va. N at Bk.of Com.
T o r folk
160 1921 1922 1923 Tl924
ioo V \
.
k
C A
:
A —^
70l
iflfl_______ A " *
W
W.VajUmon Not.
I6C| 1921
IOC
rs l-4
V\ /
Y
L l ____ l
/
\ A D
k\
” T
.
j
Va.Merchants Nat. Hampton/
160 1921 1922 1923 . 1924 J
v
/'Y, ' A
\
\
\% /AIII
>
4a
WVa Empire Nat \ Clarksburg
160 1921 1922 1\l923 1924
7ft
13®
— i
Lag
l \
40
I
1
______ I
W.Va.Citizens Nat. /\Charleston
160 1921
1922
1924
f \923
100 \ A
1 rt \ ' |TJ ''
1 /
\/
Va. dominion Nat.
1Bristol
160 1921 1922 1923 1924
'
1
]
. A
n
1\ i ; •. J#_s i
101i__/' \i
1V J
r
1 T*
70 V V
\
ifiS
l7fl \
^
/^
/
\/
" U
Iv v
-
40.
v?iison
N.C. First Nat.
'ifcfl 1921
1924
1923 7H
13ft
41LJ
5.C. Bonk of (N.&A) Charleston
160 1921 1922 1923 1924
130
_
%
1
.
7ft.
4fl_
J> x
/
v f.
\/
4£L . A _____________ ______ 1
130
199
70.
40
A
1/
#1//
y
I
/ »v
'V J ' ' •
l»f
11
w \/ y
4C
j\
______
160 19217 1922
130
X%k
X /\/A
\Y/ #
■*%/
—
r'
jml
I9fl
70.
1
I
Federal
1923 1(924
I
III /V
M
«11\ /1
P \/
\
1 y
/
/
/ A/
f
j
S.C. Norwood Nat. Greenville
160 1921 | 1 9 2 2
|
1953 U L 9 2 4 ]
n
A
(\
i
130
A
/
100
\
v h
*
\ V ?
7
;7ft \
4ft
Reserve Bank of Richmond------ Auditing Department
\
\
1
r
S.C. Peoples Nat.
1O p n *
11924 1
\
1
/\ T M
i
1
130
/ \ /• 1
|
//'m / ! nn
\\
loa
A /■' v
r
V lvl // •
v : v/
N
r
1
ft
7ft -A_i^j.1
V v
160 1921
40
\J
1 ’
1922
S£.Central Nat. Spartanburg
J60 1921
1922 1923 |1924
130.
<J \ hv A *
y\/
h
1/
J
1\'A
,
r
V
100___
-Q;
_N
/'
/
\i y v ■
40
S.C.
160
1
1
Peoples Nat Charleston!
1921 J 9 2 2 —1923
- ■ *, 1924 [
40__
\A
V
, BA N K AND DEMAND D EP O SIT S
INDEX FOR 60 BANKS IN THE SEVENTH FEDERAL RE5ERVE DISTRICT
BALANCES DUE. TO BANKS
INDIVIDUAL DEMAND DEPOSITS
FIRSTNAT
.uc; ”
(-rrt-r
C H IC A G O
(1921-1924 AVERAGE- l O
*
%•
m
STA TIS TIC S
--------------------- FEDERAL RESERVE B A NK O f C H IC A G O ------------;— '
DROVERS NAT. chl
CONTaudCOM. NAT.
STANDARD TRU5T cm
c h i.
PREPARED S i THE DIVISION O f RESEARCH
) _________________
f l -.B K . o f R E P U B L I C
chv
^ S T O C K YA R p5 W AX-
uL
- . m . -jm .
-LU-u-.
f
—Li.
// •
L]
llt)l, ,T«-]
.. . { . . . .
... r
I
1
MERCHTSamdIIL.NAT PEORIA
L 4v i . . .
ib3~l?2T
/
At
*** * t ...............f \ i
J fjp
NAT BANKofCOM.
IUMERCHT5.TRUST
H A R R ,5 T R U S T cm,
O
—
PEDPLE5 NAT
TAYLORVlflLLENAT
rock island
ibo 1921 1922] 11923
||T | 'T H T j i
IPO
. ‘/ I S *
•^
40 i l l l l l f f
iac
1914
~H~ t
_ t± r
ill .
FIRST NAT. Bloomington
1925 1924 /
IbO^'T
1'9f21» 1922 1
1i
130
.V«■ 4*
ICR T ' r.\ A
1 / *••••• ♦,
7p 1 >
♦-4-♦ T
Jifi. 1
Mill
A
I A
1# *!•«
tlwRST NATTERRE HAUTE
CITY NAT. BKxa fayette
ofPONTIAC
A
|I
IRST MEKCHT5 NAT lafayette
NATBK
1
150
7C
tckviue ill
MARION NAT m a i
FIRSTNAT
ill.
CDNTNAT
joliet
ifco 1921 T1922
|[ | 1925i 1924
!I 11
!
l !/
|f : i 11
/
1.30
•
j
r| •;
.. ^r*».
M
INDIANAPOLIS
INDIANA NATin w a n a p o l is
indFLETCHER AM.N A T . u o a n a p o u s i n d FIR5Tai®HAHNATfi^ y*
jr
1M '
’ !
4fi n il . iiLLL H U i t t
70
IO W A L O A N
.LAGRANGE
it>c 1921
1922
"n t T " TT| 1
1923
l-M '4
n I
11 t
anpT
R
j e 5m o iio
m m
LEYNAToesmwc
DES MOINES
iowa
D E S M O IN E S N A T K5MDKS
^
IJO
*• •
A
jpg
7(?
ou SECURITY NA~ &QUXCITY nuLE/MTT-JDHNSON
.5I0UXDTY io w a
.WSTER100 lOUfl
1921
TT
n rftr
LI—
1324i
MERCHT5 NAT.B
_.4 £
y^ 1
1 /
>#^T
~ *
—
li11 iiLL 11I lit:
CLINTON
urlington
htt
TTT
1*0 1921 322 J,3#_ 1924
I
T fr
„0 :
-*
L 11 •'I |
JLfiaj
ft
iowa AH.COM. andSAV.DM NPORT
IOWA
IOWA NAT.
FIRST NA'
DAVENPORT
J
4: Lio
DETROIT
H ARlNEl/L MILWAUKEE
IR5T WIS
IU.UAUKEE
T O IIN S U L A R S T A T E
d u r o it
SECONDWARD5AV.Milwaukee
Wl
PEOPLES 5‘AT E
FTDOOGE,
>23 1924
DETROIT
wts.MARSHALLwoILSLEYmil
GRAND RAPIDS
3LD NAT. GRANDRAPIDS
VICKS0URC
AMERICAN 5TATEs«ttu
PAW PA'
1924-
COMMERCIAL NATmji
FIRST NAT
.GREEN BAY
PORTAGE
922
IbO 19Z1
1923
1924
1JO'U
1 i t . t,
70 J
4£-
/
TA
W*
3 4 (*•
tH
1
W15.
ROCK CO-MAT. JANESVILLE
B A L A N C E ^ r UE T O B A N K S
IND IVID U AL DEM AND D E P O S I T S
•
BANK AND DEMAND DEPOSITS
IN DEX FOR 33 B A N K S IN
F E D E R A L R E S E R V E D I S T R I C T 12
('19 21 -1 92 4-
,CO
CROCKER NAT.
A V E R A G E = 100)
S lFRANCISCO C „ t
S F RAN C ISC O Cut
.WEST T R iS A V .-L O S AN<
CAP ITA L NAT.
1ERS&MERCHANTS N A T - R ENO
|/9^2 1/9a3 1/9-g? I
E A T T L E NAT.
1
/ 1
r
V\
s
iHawarjgi;
FEDERAL RESERVE
B A N K OF B O S T O N
F IN A N C IA L S T A T I S T I C S
D IV IS IO N
COMPARISON OF CAPITAL, SURPLUS, DEPOSITS AND RESOURCES OF MEMBER
AND OF ELIGIBLE NONMEMBER BANKS
Number
of
banks
June SO. 1924
Member banks: National
State bank and
Trust companies
Total
8,085
Capi ta l
Surplus
Total deposits
(including
bank deposits)
$ 1 ,3 3 4 ,Oil,0Q0 $1,0 8 0 ,5 7 8 ,0 0 0 $18,347,837,000
.
Total
resources
.
$ 2 2 ,5 6 5 ,9 1 9 ,0 0 0
1.570
9,650
697,075.000
2 ,0 3 0 ,3 3 6 ,0 0 0
589,669.000
1 ,6 6 9 ,5 9 2 ,0 0 0
1 1,190,198,000
2 9,529,561,000
1 3 .2 2 1 .9 8 3 .0 0 0
35,7 7 7 ,2 5 6 ,0 0 0
E lig ib le nonmember banks
13,598
899,346,000
559,659,000
♦9,731,868,000
11,5 8 5 ,5 5 7 ,0 0 0
Total member and e lig ib le nonmeaber banks
23,248
2 ,9 2 9 ,6 8 2 ,0 0 0
2 ,2 2 9 ,2 5 1 ,0 0 0
3 9 ,2 6 1,429,000
4 7 ,3 6 2 ,8 1 3 ,0 0 0
Ratio of member banks to to ta l of
member and e lig ib le nonmember
banks (per cent)
4 1 .5
A pril 6 . 1925
Member banks: National
State banks and
Trust companies
Total
69 .3
75 .2
75.5
.
8,010
1 ,3 6 0 ,6 4 4 ,0 0 0
1 ,1 0 5 ,8 3 4 ,0 0 0
1 9 ,3 72,828,000
23,8 2 0 ,1 9 2 ,0 0 0
1.521
9,531
716,858.000
2 ,0 7 7 ,50 2 ,00 0
626.242,000
1 ,7 3 2 ,07 6 ,00 0
11,853,699,000
31,2 2 6 ,5 2 7 ,0 0 0
14.1 2 9 .0 7 3 .0 0 0
37,9 4 9 ,2 6 5 ,0 0 0
♦Estimated as 84% o f to ta l resources.
Page 80
Volume 159
74.9
HP
£ p
X-U212
Federal Reserve
Board
O F F I C E
December 8 , I92 U.
C O R R E S P O N D E N C E -
TO
Governor Crissinger
FROM
Vx.
/L/i
SUBJECT: Article in the Commercial
and Financial Chronicle
for November 22, I92 U.
Goldenweiser
Eight pages of the Chronicle for November 22 were devoted to an
.article entitled “Imperfect working of Federal Reserve System - over-sat
urating credit and currency1'.
In view of the wide circulation of the
Chronicle among persons interested in financial problems, it is worth while
to consider some of the points in this editorial.
Resolution of Bankers1 Association.
The article begins with a quotation from the resolution of the
American Bankers* Association last October in Cnicago to the effect that the
operations of the Federal reserve banks "may tend to accentuate the swings of
the financial pendulum rather then to keep the swings from going too far in
eitner directior.,*' end that it should be carefully considered whether it
would not be"wise to limit the Federal reserve banks to their primary function
as banks of issue and rediscount."
The writer believes that the Bankers' Asso
ciation resolution "has come not a. moment too soon. " He thinks that "in view
of the recent glutted condition of the money markets of the country no one
can truthfully assert that the Federal reserve banks have functioned properly"and that "the volume of the circulating medium of the country is being kept
at a level enormously above what it should be. "
Page 83
Volume 159
"
Page 2.
X-^212
Causes of excessive ease in the money market.
Tile writer discusses tne reasons usually assigned for the over —
abundance of funds, namely, the trade recession and the geld inflow, but is
convinced tnat in addition to these causes the activities cf the Federal re
serve bank3 have contributed to the excessive supply of credit.
He is of the
opinion that, while the member banks have gone back to normal conditions after
the war, "the reserve banks have been unable or unwilling to get back and have
stopped at the half way point." Qn this point the writer is clearly mistaken,
since tne total volume of member banker edit at the present time is about
$2 ,300 ,000,000 larger tnan at the post-war peak in the autumn of 1920 , while
total earning assets of the. reserve banks are about $2 ,3 0 0 ,000,000 less than
they were at that time.
As proof of the statement that the reserve banks have increased the
amount of credit in the market the.writer points out that while what he calls
"mercantile paper" (discounts) at the reserve banks is now only about
$ 23 ^,000 ,000 , the reserve banks have bought during the year over $500 ,000,000
of Government securities and lately have purchased large volumes of acceptances
In this statement the writer overlooks, first, that while the reserve banks
have purchased Government securities to the extent of $500 ,000,000 there has
been
.en
equivalent decline of discounts, aijd, secondly, that purchases of
acceptances have been largely on the initiative of acceptance dealers who
have offered their bill holdings t# the reserve banks because the firmer con
ditions in the money market have caused the member banks to call some of
their loans to these dealers.
A conparison of conditions now and a year ago
,
'PaSe 3-
X-l+212
and an examination of the gold inports during the period indicate
that for
tne year- as a whole the increase of member bank credit approximately corres
ponds to the amount for which the gold imported from abroad furnished a basis.
Total leans and investments of all member banks increased by about
$2,000,000,000 between September 1 3 , 1 9 2 3 and October 10, 1 9 2 U, and net gold
inports for the period were about $375,000,000, indicating .that the gold inflow
alone, when aaded to the reserves of member banks, has been much more than suf
ficient to serve as a basis for the inoreased landing power of member banks.
Earning assets of the reserve banks, on the other hand, are n© higher now than
they were a year ago.
Functions of the reserve banks.
The writer's views on the scope and functions of the Federal reserve
system are that "the reserve banks exist only to provide surplus or excess
credit" and that "in a period of pronounced ease in the money market .. . not
a dollar of their deposits ought to be put out in the shape of reserve notes."
The question whether the reserve banks are to be merely emergency institutions
operating %-t times of seasonal or cyclical demand for excess credit or whether
they shall be continuously in the market, is a question on which there has been
much difference of opinion.
The Federal Reserve Board,- however,,has from the
beginning "taken the position that it is important for the reserve banks at all
times to remain in touch with the market *>nd tnat for this reason it is necessary
for these banks always to have in their possession discounts, acceptances, or
securities in order not to be cut off Shtirely fr*m contact with the credit
situation.
Page U.
X-l+212
.The vjt i 1 6 r 1s _ v i ew s
on cu r r en c y .
°n tne
of Federal reserve notes the writer has strong convic
tions baseo largely on a misunderstanding of the nature of the Federal reserve
note. He says that when money rates are down to 3 and 3 l/2 per cent and there
is no
mercantile demand for reserve bank credit, this is conclusive evidence
that there should be no Federal reserve notes outstanding, and that gold rather
than notes should be in circulation. This view overlooks the fact that Federal
reserve notes are not issued by the reserve banks, except in response to a cur
rency demand, and that it makes no difference in the existing credit and money
market situation
m
whether the reserve banks issue Federal reserve notes or gold
resP°nse to this demand. It is true that by paying out gold the reserve
banks decrease their potential lending power more than by issuing Federal re
serve notes, but in view of the fact that this potential lending power is now
far in excess of any probable demand for reserve bank credit, this effect of
paying out gold is of only academic interest.
The saturation point.
.
The writer says tha.t the only way the reserve banks can acquire gold is
either by issuing Federal reserve notes or by accepting gold on deposit.
From
this he argues that if the note issues and the deposit liabilities of the re
serve banks exceed their gold reserves, this is evidence that the reserve
banks have put into use more credit than they have received from the public.
This statement is fundamentally correct. It is true that to the extent that the
deposits and notes exceed the reserves Qf the reserve banks there is more bank
credit in use, as a result of the operation of the reserve banks, than there
Page 5
X-U212
would have been if the deposits had been held by the member banks and the gold
had been in circulation. The conclusion, however, that this excess, which
.
amounts to about $1,000,000,000 represents "saturation” of credit by the reserve
banka does not follow. While the excess measures the extent to which the ex1
istence of the reserve banks has added to the volume of credit in existence, it
is not clear what is meant by saturation. The fact is that the larger volume
cf currency in circulation at the present time compared with I91 U, prior to
the establishment of the Federal Reserve System, is due te the higher level of
prices. The level of wholesale prices is about 50 per cent above what it was
in 1913 and the volume of money in circulation is about Uo per cent above its
level at that time.
It may be argued that it is because of the increase in
1
currency that prices have increased, but whatever truth there may be in this
argument its proper application is to the war period and not tc recent activ
ities of the reserve banks. Prices increased during the war in the United
States and throughout the vyuarld, and in order to meet the requirements of busi
ness at tne existing price level more currency is required than was needed in
1914.
The complete adjustment between the demand for currency and the volume
of it outstanding under the present plan is one of the definite gains resulting
from the establishment of the Federal Reserve System, and this adjustment is in
no way affected by the policy of the reserve banks to pay out one or another
kind of currency, a point which the writer fails to understand. He is entirely
mistaken when he says that if the gold coming from abroad had merely displaced
Page 6
X-^212
Federal reserve notes in circu latio n there would be-no.such redundancy of
currency and no such plethora cf funds as now p re v a ils." The fa c t is that the
Federal reserve banks have paid out $700,000,000 of gold into circulation in
the la s t two years, an amount somewhat in excess of gold inports for the period,
and Federal reserve rote circ u latio n has declined by approximately the same
amount. The Federal reserve banks have paid out more gold into circulation
since the middle of 1922 than they have received from abroad, so that the to t^ l
cash reserves are now smaller than they were two years ago, but this policy has
had no effect on credit and currency conditions, beyond merely changing the form
of money in circu latio n .
Expenses of the reserve banks.
The author also discusses the necessity for the reserve banks to earn
theii expenses, and expresses his conviction tha.t this wa.s the one reason why
the managers of the system permitted the issuance of a large excess ©f reserve
bank credit,- whatever ingenious arguments they may have put forth to explain
their actions. In this connection he quotes B. M. Anderson to the effect that
gratuitous services by the reserve banks should be discontinued, and Willis to
the effect that earning assets of about $1,000,000,000 a year will be required
to meet the expenses of the reserve banks and that,therefore,the banks should
enter the market more actively. He does not argue with Willis, who believes
that the reserve banks should at all times be a large factor in themarket, but
draws from Willis1 view the opinion that the free services are a great menace
because they make it necessary for the reserve banks to keep $1,000,000,000
of credit constantly in use.
'age 7-
b2l2
The discount rate.
x.^e -.Titer quotes Anderson to t-ie effect that the discount rate should
be regularly kept higner tnan the market rate, "but goes farther than Anderson by
saying that the rediscount rate should never bo less than 5 or 6 per cent. This
function only in emergencies. Reserve bank credit, according to his view, should
be used only when it is badly needed and when a difference of a few per cent
would hardly be noticed.
To the writer "there is something preposterous about the attempt to
thrust excess credit, the only credit at the command of the Federal reserve
banks, upon the member banks when they have no need for it.** He thinks that the
effect cf this is to force banks into speculation. He says that in view of the
fact that the banks can borrow from the reserve banks at 3 and 3 l/2 per cent
and can buy good investments at U and 5 per cent, their refraining from doing
t.iis is a sign that they have better vision than the reserve banks. The fact
that member banks have at all times lent or invested funds up to the limit of
tneir available reserves and that they have now a volume of credit far in excess
of the 1920 peak is not taken into consideration in this statement. He also sees
a danger in the fa.ct that,the lower the discount rate the more the reserve banks
will have to have invested in order to earn their expenses, and that this vi
cious circle would lead to progressive inflation.
The writer^ remedies.
As a final conclusion from this discussion the writer proposes the re
peal of the 1917 amendments which required that all the reserves of the member
Page o
X-U212
banks bo kept with the reserve banks and permitted the reserve banks to issue
notes directly against gold. If the writer's views on the situation were correct
his remedies would not be adequate. With the present volume of reserves the re
serve banks could transfer to the member banks that proportion of the reserves
held by these banks prior to 1917 and still have enough funds left for any amoun
of credit expansion that may reasonably bo anticipated. Prohibiting the reserve
banks from issuing notes against gold would under the present circumstances
have no effect whatever, as is indicated by the fact, already mentioned, that
the reserve banks have actually paid out gold rather than notes to the /.extent
of $700,000,000 without any effect on the credit situation.
To sum up, the author, displeased with the fact that ‘
the interest rate
is what he considers abnormally low and believing that the reserve banks are at
least in part responsible, has based his arguments on a misunderstanding of our
system of currency issues and of the scope and limits of the power possessed by
the Federal reserve banks. There may be too much bank credit in use, but the
writer offers no fresh evidence on this point and proposes no remedies that
would accoirplish his purpose.
VI
**)
C O N F I D E N T I A L
For use of Federal
Federal
Reserve
District
st. 4926
MEMBER BANKS BORROWING CONTINUOUSLY IN EXCESS OF CAPITAL AND SURPLUS DURING MARCH, 1926 ,
ALSO BORROWINGS OF ALL MEMBER BANKS AT THE END OF THE MONTH
GROUP II - Banks in Group I
GROUP I— All banks borrowing
GROUP III- All member banks in district
whose borrowings at the end of month
continuously in excess of capital
were at least twice capital & surplus
and surplus during the month
CapiBorrowings on Mar. 31
Capi ;Borrowings on Mar. 31 Accommo
1
CapiBorrowings on Mar. 31
Ratio to
tal
Total J
tal
Num
Ratio to
dated
|Ratio to
j Num-|
tal
capital &
Amount
capital
&
and
and
Amount
ber
Num
ber j
and
j Amount
|capital & during
surplus
j
surplus
| surplus
surpl us
surpl us
ber
mo nth
| surplus |
124%
$2 , 700,000
$ 3 , 356,000
York
5
599,000
988,000
Philadelphia
4
2 , 9 70,000
3,660,000
Cl e ;el and
4
261,000
368,000
Richmond
6
837,000
1 , 220,000
146
Atlanta
2
4 , 906,000
6 ,294,000
123
Chic ..go
36
2 ,750,300
4 ,1 0 8 ,0 0 0
149
236,000
575.000
St. Louis
14
3 , 556,000
5 , 025,000
141
30,00 0
78,000
M^^earolis
10
419,000
602,000
144
Kansas City
22
3 , 3714,000
5 ,1 2 7 ,3 0 0
152
New
418
$292,400,000
$42,770,000
14.6
883
1 ,1 3 0 ,100,000
149,725,000
1 3 .2
h'-l
C\J
—1
3
' W Z :
757
3 9 7 ,733,0 0 0
6 1 ,376,000
15.4
l4 l
860
448,667,000
64,183,000
14.3
59U
200 ,000,000
145,38 7,0 0 0
2 2 .7
1495
164,466,000
49,991,000
3 0 .4
244
1,383
5 ^ 3 ,333,0 00
111 ,73 1 ,0 0 0
20.6
260
622
171,567,000
3 3 ,6 17,0 0 0
1 9 .6
822
1 0 5 ,0 67,000
14,356,00 0
4.6
1 ,0 1 6
141,200,000
lU,081,000
1 0 .0
850
143,800,000
5,648,000
3.9
724
2 75 ,900,000
49,026,000
1 7 .8
9,424
9 ,4 3 7
9,535
4 ,0 1 4 ,2 3 3 ,coo
3,982,500,000
3 ,8 1 6 ,133 ,0 0 0
5 3 2 ,391,000
5 7 6 ,643,000
397,510,000
1 5 .s
14.5
10.4
lb5
1
$ 1 2 9 ,0 0 0
$ 296,000
237>
1
60,000
50,000
123,00 0
157,0 0 0
205
31 U
Dallas
-
-
-
San Francisco
5
1 , 045,000
1 , 35 U,000
13°
50,000
126,000
252
ill
104
140
2 3 , 4 17,000
1 8 ,2 2 4 ,0 0 0
1 6 , 213,000
3 2 , 102,000
2 5 , 296,000
137
139
152
10
551,000
b69,0 00
11
18 1 ,340,000
1 ,355,000
1 ,547,000
3 ,565,000
246
225
266
-
TOTAL
Mar. 1926
Feb. 1926
Mar. 1925
FEDERAL RESERVE BOARD
DIVISION OF BANK OPERATIONS
APRIL 22, 1926.
C.
Page 84
Volume L59
2 4 , 5b8,000
3,045
2,659
2,731
T )^
FEDERAL RESERVE BOARD
W ASH IN G TO N
A D D R E S S O F F IC IA L C O R R E S P O N D E N C E T O
T H E T E D E R A L R E SER V E BOARD
August 12, 1925.
Dear Mr. Hamlin:
In accordance with the telephone request from
Mr, Moore I am enclosing herewith three statements as follows:
First, a statement showing the combined capital and
surplus of the European central banks including Great Britain
compared v/ith the Federal Reserve System.
Second, a statement showing the amount of notes
outstanding of the Federal reserve banks and of the various
central banks of Europe.
Third, a statement showing the capital and surplus
combined and the deposits of all the commercial banks in the
United States compared with corresponding figures for Great
Britain,
In the preparation of this statement we have used
figures published in the May 16, 1925, edition of the London
Statist which represent the condition of 44 banks in Great
Britain and Ireland.
For your convenience in using the statements we
have shown figures in all of the statements as published in
the reports issued by the various central banks and have
converted such amounts into dollars by using the average rates
of exchange during July.
Very truly yours,
E. L. Smead, Chief,
Division of Bank Operations.
Hon. Charles S. Hamlin,
Mattapoisett, Mass.
Enclosures.
Page 87
Volume 159
h
COMBINED CAPITAL AND SURPLUS OF THE FEDERAL RESERVE BANKS
AND OF THE PRINCIPAL EUROPEAN CENTRAL BANKS.
Monetary
Unit
Combined
capital
and
surplus
Federal Reserve Banks
Dollar
#333,514,000
Bank of England
Pound
18,072,702
Bank of France
Franc
369,259,951
Reichsbank
Reichsmark
275,191,000
Bank of Italy
Lira
240,025,412
Austrian National Bank
Schilling
45,878,711
National Bank of Bulgaria Lev
500,000,000
National Bank of Denmark
Krone
38,340,000
Bank of Finland
Markka
150,000,000
National Bank of Greece
Drachma
300,000,000
Nat ional Bank of Hungary
Krone
434,740,591,843
Lat
Bank of Latvia
14,180,960
Bank of Lithuania
Lita
12,625,000
Netherlands Bank
Florin
38,483,598
Bank of Norway
Krone
50,044,488
Bank of Poland
Zloty
101,197,010
Bank of Portugal
Escudo
18,018,749
National Bank of Rumania
Leu
101,820,109
Russian State Bank
Chervonetz
10,790,000
National Bank of the Kingdom of
Serbs,Croates & Slovenes Dinar
34,245,608
Bank of Switzerland
Franc
31,940,858
Bank of Spain
Peseta
234,000,000
Bank of Sweden
Krona
62,500,000
National Bank of Belgium
Franc
106,262,962
♦Par o f exchange
Amount converted to
dollars at average rate
of exchange for July
Rate at
which con
Amount
verted (cts )
*486.65
4.70
*23.82
3.67
*14.07
.73
21.37
2.52
1.60
.0014
*10.00
*19.30
*40.20
18.07
19.08
5.14
.49
514.50
1.76
19.41
14.51
*26.80
4.70
#333,514,000
87,950,804
17,355,218
65,550,496
8,808,933
6,455,135
3,650,000
8,193,258
3,780,000
4,800,000
6,086,368
1,418,096
2,436,625
15,470,406
9,043,039
19,308,390
926,164
498,919
55,514,550
602,723
6,199,721
33,953,400
16,750,000
*4,994,359
Aug. 5
July 29
July 16
July 15
July 20
July 23
May 31
June 30
July 15
Dec.31,1924
June 15
July 22
JUly 15
July 20
May 30
July 10
July 1
June 6
April 1
July 22
JUly 23
July 24
June 30
June 25
•
NOTE CIRCULATION OF F. R. BANKS AND OF PRINCIPAL EUROPEAN CENTRAL BANKS.
Monetary
Unit
Amount
$1,605,557,000
Dollar
Federal Reserve Banks
144,750,795
Pound
Bank of England
44,532,375,170
Bank of France
Franc
Reichsmark
2,297,861,000
Reichsbank
14,031,031,750
Bank of Italy
Lira
Austrian National Bank Schilling
746,647,099
7,590,033,630
National Bank of Belgium Franc
National Bank of Bulgaria Lev
4,173,537,067
Banking Office,
Crown
7,035,685,000
Czechoslovakia
National Bank of Denmark Krone
468,279,384
Markka
1,243,101,277
Bank of Finland
National Bank of Greece Drachma
5,062,054,818
National Bank of Hungary Krone
4,153,880,419,361
Lat
Bank of Latvia
28,283,590
Lita
Bank of Lithuania
80,309,381
Netherlands Bank
Florin
883,516,080
Bank of Norway
Krone
380,711,295
467,481,405
Zloty
Bank of Poland
Bank of Portugal
Escudo
1,641,272,686
National Bank of Rumania Leu
19,333,011,266
Chervonetz
67,243,337
Russian State Bank
National Bank of the Kingdom of
5,626,431,080
Serbs,Croates &Slovenes Dinar
4,276,782,825
Bank of Spain
Peseta
522,866,032
Bank of Sweden
Krona
772,125,195
Bank of Switzerland
Franc
♦Par o f exchange
Amount converted to
dollars at average rate
of exchange for July
Rate at
Amount
which con-|
verted(cts)
Date
$1,605,557,000
704,429,000
2,093,022,000
547,350,000
514,965,000
105,053,000
350,660,000
30,467,000
Aug. 5
July 29
July 16
July 15
July 20
July 23
July 9
May 31
2.96
21.37
2.52
1.60
.0014
*10.00
*19.30
*40.20
18.07
19.08
5.14
.49
*514.50
208,256,000
100,071,000
31,326,000
80,993,000
58,154,000
2,828,000
15,500,000
355,173,000
68,795,000
89,195,000
84,361,000
94,732,000
345,967,000
July 23
June 30
July 15
June 15
July 23
July 22
July 15
July 20
May 30
July 10
July 1
June 6
July 16
1.76
14.51
*26.80
*19.30
99,025,000
620,561,000
140,128,000
149,020,000
July
July
June
July
*486.65
4.70
*23.82
3.67
*14.07
4.62
.73
22
24
30
23
COMBINED CAPITAL AND SURPLUS AND DEPOSITS OF COMMERCIAL BANKS IN THE
UNITED STATES AND IN GREAT BRITAIN AND IRELAND.
United States
Great Britain and Ireland
Capital and Surplus
$5*522,766,000
£176,669,000
$859,760,000
Deposits
41,006,177,000
2,335,993,000 11,368,110,000
Figures for the United States are as of June, 1924, and include
National hanks, State banks, trust companies, stock savings banks and private
banks.
Figures for Great Britain and Ireland are for December, 1924, and are as
given by the London Statist for "Banks in Great Britain and Ireland exclusive
of the Bank of England,"
Ak
/ /
L M i
-Jot
j.PBHT I At
AVERAGE AMOUNT OF "FLOAT" CARRIED BY THE FEDERAL RESERVE BANKS
ON WEEKLY STATEMENT DATES DURING MARCH 1 9 2 6 .
f o r ■ p u i^ A jtttio n
Total
(Amounts in thousands nf rfnTl^rcA
C la ssific a tio n of
Uncollected items
("Float (excess of unccl1 lected over deferred. .
availability items)?
'--
deposits
Amount'
Boston
1,230
Per cent of
' total
depc s i t s ''
.. 8 ..
Transit
items
j.Clearing
House
Ex
change s
52,333
1,466
Philadelphia
Chicago
8 t.
2,539
56,350
58,889
155,584
5,527
125,777
131,304
6 3 ,9 0 1
3,536
55,306
58,842
63,853
2,346
55,934
58,280
53,115
7,953 j;- 2,822
b
5,573
3.1
59, d07
c:,Sb4
5,06b
4.3
54,594
2, bcl
ldO
712
58,093
4,083
50,944
55,027
5,230
b.l '•
35,852
- 713
80
1.899
38,544
1,854
31,400
33,254
. ... b24
2,830
59,942
5,416
73,222
78,638
105
1,258
34,04b
659
33,163
33,822
43b
327
13,149
1,045
H,521
12,566
.1 , 1 4 7
42,537
1,561
36,179
3 7 ,74 c
26,375
1,335
27,889
2 5 ,224
39,337
1,569
38,534
40,403
68 5,480
31,770
27,201
568,882
27,723
529,644
11,304
Louis
224 "
81, bS9
3-5
19,521 •
M h
$1 (
32,148
•3
i
Minneapolis
533’
iKansas City
60,119
3-7
5,059
Cleveland
Atlanta
131,-345
2 b2
4 ,2 5 s
134,98'
Richmond
2.7
.58
rr
0
Zj-
24,280
4,797
Dallas
(a)2,5h9
San_ Francisco
(a)l,0 6 b
1.0'
5.5--
12,085
■
40,770
> 1('
26,156
~ *w
3^1
- a—r~
465 .
•-
m
1,331
TOTAL
1926
192 5
1924
FEDERAL
reserve
2,297,041
2,222,140
2,006.034
57,451
2.5
6 5 ,o46
63,572
2.9
3.2
42,80.3
.6 , 2 7 4
15,599
^2,090
12,560
12,788
^ ,2 3 8
7,172
14,486
'
bbl,62Q
620,939
board
DIVISION OF BANK OPERATIONS
APRIL 17, 1926.
C.
Page 91
Volume 159
C la ssific a tio n of
___ Deferred availability items
*Govern- ~]
rnent
Other
Total
transit
( transit
items
I items
(F. R. notes(
Other | of other j Total
cash j F. R.
items | banks
■
New York
st. 492U
(a)
Ex\-c^ of deferred
a v a ila b ility over uncollected
items.
596,219
627,929
596,033
557,367
FEDERAL
RESERVE
BANK
OF NEW YORK
April
21,
1926
Dear Mr. Hamlin:
When Mr. P la tt, Mr. Curtis and myself appeared before Senator
McLean* s committee, he requested th a t we consider whether or not we would
consent to an amendment in the Pension E ill to put a lim itation on the
amount of pensions th a t might be provided under any plan approved by the
Federal Reserve Board.
You will doubtless recall that our committee had considered th is
question from every angle and most thoroughly before we decided th a t lim ita
tions in the b ill as distinguished from lim itatio n s contained in the plan
would be extremely unwise and undesirable.
Under the circumstances, I have thought th at i t would be wre ll to
fo rtify myself with a carefully considered opinion and argument against any
lim itatio n in the b i l l , p articu larly against a lim itation expressed by way
of d o llar amount of pension.
Accordingly, Mr. Sayre has w ritten me a l e tte r ,
statin g the basic arguments against i t , which seems to me to be extremely
good and I am enclosing several copies of i t for your consideration and such
use as you might find for them before the next hearing before Senator McLean*s
committee.
I am enclosing some copies of i t also to Mr. P la tt and to
Governors Fancher and McDougal.
Very tru ly yours,
Hon. C. S. Hamlin,
c/o Federal Reserve Board,
Washington, D. C.
r nc8.
E. R. Kenzel,
Chairman, Pension Committee
Page 95 —
Volume 159
THE CHURCH PENSION FUND
14 W all Street
New York
A p ril 2 0, 1926
My dear Mr* Kenzel:
In regard to the question of Senator McLean as to the a d v isa b ility
of inserting in the Charter of the proposed Federal Reserve Pension Fund a
provision fo r a maximum pension, I would say that I think that such a provision
would be highly inadvisable and I would suggest that the Committee of the
Governor*s Conference strongly urge the reasons which make i t inadvisable*
Pensions are one of the few things in which i t is necessary to take
into consideration long stretches of time*
This d iffe r e n tia te s pensions
sharply from most business enterprises which do not have to look forward more
than a comparatively short time*
On account of th is essen tial ch aracteristic of pensions, that i t
must look forward over a long period of years, i t is highly inadvisable that
i t s fundamental regulations should contain arb itrary re strictio n s* 'We liv e in a
changing world* a world in which change tends to become more rapid* In few
things have there been greater or more rapid changes than in the value of money
and, th erefore, in the cost of liv in g and the remuneration for services* I t i s
w e ll known that many charitable and educational in stitu tio n s in England,
established between the reigns of James I and Anne, that i s , roughly during the
seventeenth century, have become wholly obsolete and have had to be en tire ly
refonned owing to arbitrary regulations in regard to payments, quite suited to
the seventeenth century, but inappropriate eventto the middle of the nineteenth
century* Since the middle of the nineteenth century, the change in the value
of money and in the cost of liv in g has proceeded with accelerated a c t iv it y , so
that those regulations which would have been quite appropriate in 1880 are
e n tire ly out of place in 1926*
I f , th erefore, the Committee on Banking and Currency in the United
States Senate should put in the proposed Charter any arbitrary maximum, while
the figure might be defended at the present tim e, i t is quite conceivable that
by 1950 i t might be a most burdensome re strictio n *
I t should be pointed out that the regulations in regard to pen
sions are to be made by a Board, on which there is a representative of the
Board of Directors of each Federal Reserve Bank and a representative elected by
the Federal Reserve Board.
These representatives w i l l naturally be interested
in preventing undue drafts upon the treasuries of the Banks. Furthermore, what
ever regulations are made by these Trustees must be approved by the Federal
Reserve Board and i t w ill naturally be a le r t to prevent im positions.
In the
la s t a n a ly sis, Congress reserves to i t s e l f the right to a lte r and amend the
Charter and could take further le g is la tiv e action in the improbable event that
the Board of Trustees so constituted should act unreasonably and that th eir un
reasonable action v/as approved by the Federal Reserve Board*. I t w i l l be
realized that i t i s one thing fo r Congress to have the power to change some
2
action which may appear unreasonable, and quite another thing for i t to put
in the fundamental regulations a proyision which may afterwards have to be
gotten out*
Apart from the differen t aspect of the parliamentary situ a tio n ,
a l l kinds of questions of equities would a rise in the la tte r case, and make
administration extremely d iffic u lt*
The above considerations would apply, i t seems to me, to any kind of
arbitrary provision inserted in the Charter of an organization whose essen tial
characteristic is that i t must act on suppositions stretching over an exceed
ingly long period of years* But I think they are s t i l l stronger when the sug
gested re str ic tio n concerns the maximum pension*
v/hile i t i s important that there should be a provision for the re
tirement of the clerks and minor o f f i c i a l s of any commercial in stitu tio n , i t is
s t i l l more important that there should be a provision fo r the retirement of
the higher o f f ic ia ls *
I f a clerk in a department becomes incapacitated by age
or d is a b ilit y , and cannot afford to resign , h is fellow clerks generally close
around him and carry h is work; and while there may be some in e ffic ie n c y , and
some lo s s , the matter is not especially serious*
I t becomes serious, of course,
i f i t i s apt to be m ultiplied by many instances* But when the head of a
department, or the supervising o f f i c i a l in charge of a group of departments be
gins to display those q u a lities of lack of in it ia t iv e and lack of openness of
mind, e tc * , which sometimes go with advancing age, the r e s u lt, i f he i s re
tained in o f f i c e , may be serious indeed*
I t may mean absolute calamity to the
business enterprise*
Yet the fact that he has had a f a ir ly high salary is
absolutely no guarantee that he may be more able to r e tir e without a pension
than a clerk is*
In f a c t , i t might bo a greater wrench for him to give up his
salary and liv e without a pension than would be the change in the circumstances
of a small clerk*
The same thing is tru e, in le sse r measure, but s t i l l with
great e f f e c t , i f some pension is offered to the higher o f f i c i a l , but i t is
grossly inadequate*
Nothing i s so valuable in pensions as the a b ilit y to re tire the top
men*
And, of course, the pension has no tendency to enable the top men to be
r e tire d , unless i t i s a f a i r ly adequate pension*
Therefore, arbitrary lim ita
tion s about the amount of any pension are a direct defeat of the very aim for
which pensions exist*
And in the case of a contributory system* lik e the
proposed Federal Reserve one, where half of the cost is paid by the o f f i c i a l s
and employees themselves, there is an obvious automatic check on any undue
demand as to the size of pensions*
The above arguments apply prim arily to a maximum expressed in terms
of d o lla rs.
They are much le s s cogent i f the proposed maximum should be
couched in terms of percentage of salary, although even in th is case, I think
i t unnecessary to put in a Charter those regulations which may w ell be pro
vided otherwise*
A maximum in terms of percentage of salary a lte r s with a f a i r
correspondence to the ratio in which the value of money and the standard of
sa la ries a lt e r , and th erefore, does not t i e up a pension organization irremed
iab ly to a socia l condition which may become obsolete*
Such maximum percentages
are u su a lly •defined in terms of some form of a terminal salary, as that no
pension should exceed seventy percent of the average salary for the la s t fiv e
years of service*
The proposed pension plan fo r the Federal Reserve Banks is a con
servative one, and one of the main aspects in which i t is conservative is in
3
the adoption of the average salary throughout the entire term of service as
the basis of calculating the pension, and not any form of terminal salary*
There are other advantages in the use of the average salary, but the main one
is i t s strong and constant tendency to keep down the amount of the pensions*
The basis o f calculation for the pensions in the proposed Federal Reserve
system w i l l hardly ever make the amount of a pension exceed f i f t y percent of
the terminal slary*
For these reasons, which i t w i ll be observed are basic ones, I
sincerely trust that the Committee on Banking and Currency of the United States
Senate w i l l be w illin g to leave th is matter to the determination of the
Trustees of the proposed fund, under the supervision of the Federal Reserve
Board, i t being provided in the d raft of the System, which w ill be la id before
these Trustees as soon as they are constituted, a l l salaries in excess of
$18,000 a year, for the purposes of the pension system, be considered as of
that amount* This seems a reasonable rule for the present, but i t can hardly,
it is resp ectfu lly submitted, be embodied in the fundamental document consti
tuting such a fa r reaching organization as the pension system*
I an
Very sincerely yours,
(Signed)
Monell Sayre
Mr* E . R. Kernel
Deputy Governor of the Federal Reserve Bank of New York
33 Liberty Street
New York C ity
.
i
_Le^ &U
'j'J
TO:
The Federal Reserve Board
X-4314
From: Divisions of Bank Operations and Research and S t a t is t ic s .
THE i/ICFADDSN BILL TO REVISE THE 'FEDERAL RESERVE ACT
General purposes of the amendments
The amendments to the Federal Reserve Act proposed by Congressman McFadden
immediately prior to the adjournment of the la s t Congress apparently have two
purposes: (1) To reestablish a closer connection between the volume of Federal
reserve notes in circu la tio n and the currency requirements of business.
With
th is in view the b i l l prohibits the use by reserve banks of gold and of accep
tances purchased in the open market as c o lla te r a l for Federal reserve notes,
leaving discounted paper as the sole authorized c o lla te r a l.
(2) To reduce the
lending power 0 1 the reserve banks, by perm itting member banks to withdraw from
the reserve banks, and to hold in th e ir own vau lts, a part of their required
reserves.
Both of these objects appear to be based la rg ely on misconceptions a r is
ing from imperfect appreciation o f the experience of the system.
The f i r s t of
them assumes that the volume of Federal reserve notes in circu la tio n currently
depends upon the character of the paper or other c o lla te r a l which may be used
as cover fo r the notes, but experience has demonstrated that th is is not the
case.
Notes get into general circu la tio n only when customers of member or
nonmember banks withdraw currency to meet their current needs.
Member banks
retain in th e ir own vaults only such an amount of currency as they need to
meet daily requirements, because i t does not pay then to keep more, and i t is
only when these daily requirements increase, by reason of the demands of the
public, tnat member banks fin d i t necessary to obtain more currency from the
reserve bank, using any acceptable c o lla te r a l that they nay have.
Page 97
Volume 159
The
-
2
-
X-4314
e la s t ic it y of the Federal reserve note does not depend on the character of
c o lla te r a l that member banks use to obtain currency.
Federal reserve notes
issued against gold cone in fo r retirement as promptly as notes secured "by
commercial paper.
It is through the Federal reserve banks1 meeting the cur
rency demand when i t a rises that the amount of currency in circu lation is constan tly adjusted to the requirements of business.
The provision authorizing member banks to hold part of their reserves in
th eir own v a u lts, which is apparently intended to diminish the lending power
o f the reserve banks, through a reduction o f their reserves, would have l i t t l e
e f f e c t , when taken in conjunction with the other proposed amendments, because
member banks would have no inducement to exercise th eir option to any extent.
That portion o f their resources which the law or experience requires the member
banks to hold as reserves would remain inactive and unproductive of earnings,
under the proposed amendment as i t is under e x istin g laws, and a mere trans
fe r of reserves from reserve banks to member banks would not increase the
member banks * lending power or earning capacity, but would merely reduce the
lending power of the reserve banks.
G-old with the reserve agents not to count as reserves
The provision in the McFadden b i l l that gold held with the Federal re
serve agent sh a ll not count as part o f the reserves of the reserve bank is a
repeal of an amendment adopted in 1917, p rin cip a lly fo r the purpose o f fa
c ilit a t in g note issues and perm itting the reserve banks to count a l l the gold,
whether held by the agent or by the reserve bank, as part o f th eir reserves.
Notes were exchanged for gold prior to the amendment butthis was accomplished
m a roundabout way, and i t was thought best to authorize the direct exchange.
-3-
X-4314
The e ffe c t o f th is proposal at the present tine would "be that of the
$ 1 ,7 0 0 ,0 0 0 ,0 0 0 of Federal reserve notes in circu la tio n , only about $400,000,000
could continue to be a l i a b i l i t y o f the reserve banks because th is is the
to ta l amount of discounted, paper held by the twelve reserve banks.
Against
the rem inder of the notes, the Federal reserve agents now hold gold and in
order to comply with the proposed amendment the reserve banks would have to
follow one of two courses; either to pay this gold out into circu lation in ex
change for an equivalent amount o f Federal reserve notes; or to impound the
gold with the agent to be held by him exclu sively for the redemption of notes.
The reserve banks would probably adopt the procedure of le tt in g the
.
$ 1 ,3 0 0 ,0 0 0 ,0 0 0 of gold held by the agents as cover fo r notes be applied to the
reduction of the banks’ l i a b i l i t y on reserve notes.
Thus the gold as an a s
set and an equivalent amount of notes as a l i a b i l i t y would be taken out of
the reserve Danks’ balance sheet and would appear only in the account ofthe
Federal reserve agents.
Under present conditions the reserve banks would
a fte r th is transaction s t i l l have a reserve o f about 60 per cent against
th eir combined note and deposit l i a b i l i t y .
In some o f the reserve banks,
however, the resu lt would be a deficiency of reservesover at the present tin e .
The reserve banks could increase the volume of pancr e lig ib le as note
cover at their disp osal; i . c . , paper e lig ib le as coVer under the amendments,
by s e llin g acceptances and se c u ritie s and thereby causing member banks to
discount paper with the reserve banks.
While tech n ically th is would be a
method of increasing the volume of paper e lig ib le fo r note cover, i t would
involve a complete withdrawing of Federal reserve banks from open-market
operations.
Under the McFadden proposal the n ote-issu in g power of the reserve banks,
•
m
- 4 -
X.H3 IU
whicn is new lim ited by reserve requirements, w ill ce lim ited in addition
by the amount of e lig ib le paper availabe as c o lla te r a l fer note issue.
As
pointed out e a r lie r , th is additional lim itation dees not increase the e l
a s t ic it y of the reserve note but merely erects a cumbersome p iece of mach
inery that might under certain conditions prevent the smooth performance
c f their functions by the reserve banks.
A situ a tio n night even a rise ,
under the proposed amendment, where reserve banks, by reason of low re
serves ®nd snortage of e lig ib le paper, could not issue Federal reserve
notes to member banks unless these banks borrowed
$3 .:-0 from the reserve
Carles, and kept $2.00 of this on deposit with the reserve banks, in order
" tain $ 1 . C'o cf Federal reserve notes.
Under conditions c f unusual
c re d it and currency demand, therefore, the McFadden amendment would cause
unnecessary d i f f i c u l t i e s to our banking system, aid since the te s t of the
soundness of a oanking system is the way i t would stand up under a strain th is is a serious argument against the proposal.
In considering the p o ssicle e ffe c t cf these amendments in decreasing
tne gold reserves o f the reserve banks through further increases cf gold in
c ircu la tio n , the fact should not be overlooked that the gold now held by
the reserve banks for the most part was not withdrawn from domestic c ir c u l
ation but was imported from abroad.
As the r e s u lt o f paying out gold ce rt
i f ic a t e s the volume o f gold in circu lation at the present time is nearly as
large a.s before the system was established, and the reserve banks in re
cent months have also met cut o f their reserves a considerable demand for
gold for export.
« »
- 5-
X-U314
The chief effect of the proposed amendment relating to g d d cover
appears to be to lower the reserve ratio of the reserve banks by im
pounding a part of their reserves with the Federal reserve agents.
At
a time when reserves are ample, as at present, the impounding of the
gold would not bring the reserve ratio near the legal minimum, but
under conditions of exceptionally large demand for credit and currency
the amendment would interfere with the smooth operation of the reserve
banks and might make necessary a suspension of reserve requirements.
Acceptances ineligible as collateral against notes
In prohibiting the use of acceptances as cover for Federal reserve
notes, the amendment places acceptances in regard to ineligibility a.s
cover for notes on the same footing with United States securities, the
other cla.ss of open-market purchases cf the reserve banks.
Acceptances,
however, are a.s directly connected with the financing of current busi
ness as are promissory notes, and reflect the underlying commercial
transactions in contrast to paper secured by United States obligations
which is now eligible and would continue to be eligible under the
amendment, to serve as cover for Federal reserve notes.
It is probable
that the object of this amendment is not sc much to increase the elastic
ity of the Federal reserve note a.s to limit the reserve canks* openmarket operations.
- 6 -
jxUt.icrity to hoiJ part cf reserves in members* vaults
proposal tv authorize number banks to hold part cf their required
reserves in their own vaults would in its present form permit member banks
to count as part of their reserves the vault cash which they new carry as
till money.
If the amendment were adopted without increasing the reserve
requirements of member banks, it would make availaole to the member banks
about $5~C >w w ,v,^vj whicn they could use either as a basis for additional
lending or to reduce indebtedness at the reserve banks.
'Vhen in 1917 re
serve requirements changed so as to make only balances at the reserve
banks count as legal reserves for member banks, at the same time required
reserve percentages were reduced in recognition of the fact that the cash
w m c h member banks would continue to carry in their vaults would ro longer
^cunt as reserves.
The present proposal to permit the vault cash of member
banks to be counted as reserves without correspondingly increasing the
iega.l reserve requirements would result in reduced borrowing at the re
serve banks and in member banks seeking increased investment for their
released funds*
If the proponents of the bill would upon consideration decide to in
clude in the amendment an increase in reserve requirements equal tc the
amount of cash in vault, the proposal would have relatively little effect
on the credit situation.
F
l-'o
orm
r m No.-iai
N o .-ia i.
/
£*c
.
tU,
FEDERAL RESERVE
BOARD
Date .April 8, 1926
T o ---- Mr. Hamlin
From
Subject:.
Mr. Goldenweiser
Prices, Currency, and the
Beserve Banks
Personally I am opposed to the inclusion in the Federal Reserve Act of
any reference to price stabilization as an object of Federal reserve policy.
Such a clause in the law would tend to encourage the belief that the Federal
reserve system has the power, not merely to influence, but actually to con
trol prices, and would thus make the system responsible in the public mind
for price fluctuations.
The worst of this matter is, furthermore, that a
great many people would expect the system not only to regulate the price
level, which to them is an abstract proposition, but to influence the prices
of the particular commodities in which they are interested.
The system would
be blamed by the cotton growers, for example, whenever the price of cotton
declined and by the wheat producers when the world price of wheat was lower
than they might desire.
These considerations in themselves are a sufficient
reason for opposing the Strong amendment to the Federal Reserve Act.
From a broader point of view, it may be stated with assurance that at
certain times and under certain circumstances the Federal reserve system can
exert an influence on prices.
This would be particularly true at times when
there is an extremely rapid advance in prices as the result of unusual cir
cumstances.
It is now pretty generally believed, for instance, that an
earlier advance in discount rates might have prevented some of the extreme
price rises in 1920.
As you know, there were good reasons for not advancing
.i
the rates, but had it been possible to advance them, it is probable that
prices would not have gone up as high as they actually did in 1920.
On the
other hand, I am doubtful whether reductions of rates can be as effective in
Page
9<f
Volume
:»v
I t a i f f l ?**»»«■
159
F o rm
N
o
41 3 1 .
*
FEDERAL RESERVE
BOARD
Office Correspoi ence
To
From_
Date
'______________ |
Subject:__
______________________
-
2
-
arresting a fall of prices as advances in rates can "be in stopping a rise
in prices.
The principal reason for this difference is that at the time of
falling prices member banks are rapidly paying off what they owe to the re
serve banks and reductions in discount rates are not likely to hasten these
repayments.
In 1921 and 1922 there was a series of reductions in rates from
7 per cent to 4 per cent, but borrowings at the reserve banks continued to
decline. .
Whatever influence the Federal reserve system can have on prices can
best be exerted, not by following changes in price index alone, but by
taking into consideration the entire series of business and credit indicators
which the system has at its command.
In other words, the system can best con
tribute to the stability of prices by working for the stability of business.
The price index, as was pointed out in the 1923 report, registers an accom
plished fact and becomes known usually too late for effective action by the
Federal reserve system.
By following developments in production and distri
bution, the accumulation of inventories and the use of bank credit, the system
may be able to detect evidences of maladjustment in industry long before these
maladjustments have been reflected in price changes, and to take measure to
exert a corrective influence that may prevent the occurrence of changes in the
price level.
In connection with the relation between the volume of currency and prices,
it ought to be kept in mind that in the United States the great bulk of pay-
Fo r m No. LSI
Office Correspoiroence
FEDERAL RESERVE
BOARD
To _____________________
Date.
Subject:__
From_________________________ i______ _ _
ments are made ty check and not by currency, and that the volume of currenay
outstanding at any time in our banking system is closely adjusted to the
requirements of the public in meeting payrolls and providing till money and
pocket money.
ITo one carries any more cash in his pocket or in his till just
because there is more currency outstanding.
The currency that is not needed
is immediately deposited by the public with the banks and by the banks with
the reserve banks, so that no direct influence on prices can be exercised by
the Federal reserve system through issuing additional currency.
On the other
hand, to contract currency is almost impossible under existing conditions
without greatly disturbing trade and industry.
The attached chart shows that
there is a fairly close correspondence between the big swings in money in
a.
circulation and in prices.
This is due to the fact that at the time of full
employment and high prices there is an increased demand to meet payroll and
till money requirements.
It is interesting, however, to note that minor
fluctuations in prices and in money in circulation do not by any means coincide.
Thus, in 1923 prices declined and the volume of money in circulation increased;
in 1924 prices increased and money in circulation remained constant; in 1925
money in circulation remained constant and prices once more declined.
The
problem of the elasticity of credit and of currency requires more space to
discuss than can be given to it in this memorandum, and I am sure you are
thoroughly familiar with the argument.
I do with to point out here, however,
that the demand for currency arises at a much later stage in the business
u T M K i m r e .«rw * i rw*»*«
!
- 4 -
situation than the demand for credit, and that at a time when there is a
currency demand the Federal reserve system can not afford to be placed in a
position of restricting the supply of cash necessary for the conduct of the
nation*s business,
The substance of this memorandum may be summed up by saying that the
Federal reserve system can best work towards price stability by being guided
in its policy largely by other factors than the price index, and it can best
contribute to the proper adjustment of the volume of currency to the public*s
needs by shaping its credit policy with reference to charges in credit condi
tions rather than in the volume of currency,
I
attach herewith a table showing the volume of money in circulation by
months from 1917 to date, showing also changes for the first and last half of
each year.
Mt:4«rrtri
•JMai
-t p - aiiioiaAtioB
______________ (A JsU U ftM ^--ila3clj»BLL
t 1917
January
February
I'aroh
A p r il
ray
June
J u ly
August
w lp tttrler
O ctober
Foret&er
December
January
February
la r c h
A p r il
Jana
July
august
: aptcnbor
Octobor
Toramber
Dooanhsr
s
. 1916
t
i 1919
3 ,9 1 6
4 ,1 0 1
4 ,1 1 7
4 ,1 5 2
3 ,6 4 9
3 ,8 4 $
3 ,9 4 0
3 ,9 7 0
4 ,0 3 5
4 ,1 3 1
4 ,2 5 4
4 ,1 0 5
4 ,1 9 3
4 ,2 5 7
4 ,3 1 0
4 ,2 8 3
4 ,3 3 6
4 ,4 5 0
4 ,6 5 3
4 ,9 2 6
5 ,0 6 6
5 ,1 3 0
1925
1926
4 ,9 9 3
4 ,7 5 2
4 ,8 0 4
4 ,7 7 5
4 ,7 2 5
4 ,7 7 4
4 ,7 2 4
4 ,7 2 0
4 ,7 6 4
4 ,6 2 7
4 ,9 0 1
4 ,9 7 2
5 ,0 0 6
4 ,7 4 0
4 ,8 1 4
4 ,8 0 6
6 ,1 0 5
4 ,8 6 9
4 ,8 5 1
4 ,8 4 1
4 ,8 4 6
4 ,8 0 9
4 ,7 3 5
4 ,7 9 4
4 ,8 5 3
4 ,9 5 9
5 ,0 3 4
5 ,1 7 2
t
t 1920
5 ,3 1 2
5 ,1 2 8
5 ,2 7 6
6 ,2 7 3
5 ,2 9 1
5 ,3 5 3
6 ,3 5 2
5 ,3 6 5
5 ,4 6 0
5 ,5 5 3
6 ,6 2 6
5 ,5 8 4
s
1922
5 ,6 4 5
5 ,3 4 8
5 ,2 9 7
5 ,1 5 0
6 ,1 0 7
5 ,0 6 3
4 ,8 4 3
4 ,7 2 3 -k
4 ,6 6 9
4 ,6 6 5 ‘
4 ,6 1 1 ^
,4 ,6 6 1 ^
i 1988
4 ,6 0 5 4 .3 5 3
4 ,4 0 2
4 ,4 1 3 4 ,3 8 5
4 ,3 7 0 ^
4 ,3 7 4 ^
4 ,2 2 7 ,
4 ,3 9 4 k
4 ,6 2 1 -'
4 ,5 7 0 4 ,6 1 7 k
4 ,7 3 3
4 ,5 0 9
4 ,6 1 1
4 ,5 6 6
4 ,6 6 6
4 ,7 o 6
4 ,7 3 0
4 ,6 9 6
4 ,7 7 8
4 ,6 6 0
4 ,6 3 5
4 ,9 2 3
i
4 ,9 5 1
4 ,6 € 1
4,8C
4,83
4 , v<
4 ,8 1
4 ,7 6
4 ,6 6
4 ,7 7
4 ,6 0
4 ,6 6
4 ,9 6
1927
4f\
A p r il 1 , 1 9 1 7 , r o r a r -v r 1 , 1 9 2 0 , J u ly 1
(each y<*.r) anti J u ly 1 , 1921 to data f u l l y
comparable* A ll oth ers fanaer B u lle tin
b a s is , a s c o rr e c te d .
r
IK GREASE OR DEGREASE IK MONET IK CIRCULATION - SIX MONTHS*
PERIODS - JULY, 1917 TO JANUARY, 1926
(In millions of dollars)
1917;
July 1 to January 1
+ 407
1918:
January 1 to July 1
July 1 to January 1
+ 60
+ 769
1919;
January 1 to July 1
July 1 to January 1
- 310
+ 517
1920;
January 1 to July 1
July ]N*o January 1
20
+ 313
+
1921;
January 1 to July 1
July 1 to January 1
- 802
- 238
1922;
January 1 to Jjtly 1
July 1 to January 1
- 231
+ 359
1923;
January 1 to July 1
July 1 to January 1
+
1924; \
January 1 to July 1
July 1 to January 1
- 196
+ 238
1925;
January 1 to July 1
July 1 to January 1
- 259
+ 274
-
3
221
!*q
c o h f i d :^ii ;.l
■£<-<- A / t
Tentative btatement Subject to Itovision.
.LIMITS OF EXPANSION OF BANK CREDIT IN RELATION TO MEMBER RANK
HESEKVLS.
Definition of the -problem.
The extent of probable expansion of the total volume of bank credit out
standing on the basis of a given increase in the reserve funds available to mem
ber banks is a problem of considerable importance in estimating the effect upon
credit conditions of an incroaso in reserve balances of member banks arising
from an extraneous cause, such, for oxamplo as the inflow of gold, or a change
in the reserve requirements imposod by law upon member banks.
This problem is
distinct from the question of a potential expansion of credit based on a larger
use of the lending power of the Fwdoral reserve banks, sometimes called secondary
expansion, which has no direct bearing on the prob&blo extent of growth in the
volume of bank credit consequent upon the addition of a given amount to the re
serve funds at the disposal of member banks.
Used to_isolate the influence of factor under consideration.
In order to measure the probable extent of this growth the influence of the
addition to reserve funds must be isolated from other counteracting influences.
If, for instance, $3^0,000,000 were addod to the available rotorve funds of mem
ber banks through a reduction in legal reserve requirements, the effect of this
increase in reserves on tho credit situation might be entirely offset by a si
multaneous export demand for an equal amount of gold, by an equivalent reduction
in member bank borrowings at the reserve banks, or by a sale of these banks of
an equal amount of securities in the open market.
The operation of offsetting
factors such as these might neutralize tho effoct of tho incroaso in reserve
funds, and thus obscure its influence, without, however, changing the character
Page 107
Volume 159
2
and extant of the influence.
It is only by isolating a factor and by assum
ing that it will operate without interference from other unconnected circum*
stances that it is possiblo to arrive at an estimate of the influence of the
particular factor taken by itself.
In making, the following estimates of
probable expansion it will be assumed, therefore, that $500,000,000 have been
added to the reserve funds of member banks, that no part of this amount has
been used to reduce borrowings at the reserve banks, and ‘that the effect of
this adaition to reserves on the growth in the volume of credit has not been
offset either by the sale of securities by the reserve banks or by a demand
for gold for export.
■5222—
of banks to expand and the limiting factor.
In determining the extent of credit expansion that is likely to result
from an increase of a stated amount, $500,000,000,in member bank rosorvos,
two circumstances must bo taken into consideration:
(A) member banks tend to
make full use of their funds and seldom carry a considerable amount of reserves
in excess of legal requirements, and (2) thoro is a relationship botwoon the
volume of bank deposits at a given time and the amount of currency in circula
tion.
The bearing of these two circumstancos on the problem under discussion
t
is that member banks may bo expected to increase thoir own deposits, by grant
ing loans and making invostmonts, to tho full oxtont that tho additions to
thoir rosorvos would legally supoort, but this growth in deposits would load
to an inoroasod demand for currency by tho customers of mombor banks.
In
citing this additional demand for currency, the mombor banks would uso a part
of thoir nowly acquired reserve funds, and tho currency demand would thus
limit tho amount available as reserves for deposits.
a
It should be rocalied
increase in the deposits oi member banks increases their reserve re
quirements on the average by only one-tenth of the increase, while in mooting
3.
a demand for a given amount of curroncy mombor banks must omploy an oqual
amount of thoir rosorvo funds. For this reason, an addition of §500,000,000
*
•
to rosorvos, if thoro woro no incroaso in tho domand for curroncy, would onablo mombor banks to oxtond additional crodit to tho oxtont of about §5,000,
000,000, whilo thoy could oxtond only §500,000,000 of additional crodit if
thoro woro a domand for that amount of additional curroncy.
At what point
within this range from §500,000,000 to §5,000,000,000 tho actual oxpansion
.
_
fall would
on tho basis of tho additional rosorvo funds would/dopond upon tho oxtont of
the domand for curroncy that would accompany tho growth in tho deposits.
Elements entering into tho problem.
Tho throo elements entering into the determination of tho probable crodit
expansion on the basis of §500,000,000 added to the available reserve funds of
member banks are (1) tho resultant growth in demand deposits of all banks in
tho United States, (2) tho growth in curroncy domand, and (3) fch3 incroaso in
tho rosorvo requirements of mombor banks.
Individual domand deposits of all
banks in the United States have boon chosen as tho most significant figuro
because thoy represent, broadly speaking, the total volume of bank crodit
available to the public as immediate purchasing power, and it is with tho
effect of the increase in reserve funds u ion this total that tho prosont dis
cussion is primarily concerned.
Time deposits have boon eliminated as not
being primarily a factor in the volume of current purchasing power, and bankers*
usances as being to a large oxtont a duplication of individual doposits.
While it is thus the growth in individual domand doposits of all banks that is
tc be determined, it is tho increase of tho rosorvo requirements of member
banks alono, together with tho incroaso in currency damand, that would actually
omploy and use up any additional-reservo funds made available to the member
banks.
The growth in the deposits of nenmember banks would lead to increased
reserve requirements for these banks, both in the form of balances with
4*
correspondents and cf cash in vault.
j
This growth in nonmombor bank
rosorvos
would on tor as a factor into tho growth of tho deposits of member banks, with
which tho bulk cf nonmombor bank rosorvo balances aro hold, and into tho in
creased demand for currency to bo hold as vault reserves by state banks and
: trust conpanios. Mcnoy in circulation, as definod by tho United States Treas
ury, and as used in this analysis, includes all curronoy outsido of tho Treas
ury and the Federal reserve banks and, thoroforo, an increased demand for
vault cash by banks would be reflected in an increase in the volume of money
m
circulation.
Tho growth of nonmember bank doposits would, thoroforo, ontor
only indirectly into tho problem of how the additional $500,000,000 of rosorvo
funds would bo omployod, the channels through which those deposits would bo
felt being tho growth in reserve requirements of member banks, arising from
holding the reserve denosits of nonmember banks, and tho increased demand for
currency arising from increased vault cash requirements of nonmombors.
It is
through those channels that an addition to reserve funds of mombor banks
becomes felt throughout tho entire banking structure and servos as a basis for
growth in the volume of credit extended not by mombor banks alone, but by all
banks in the Uni tod States.
_
Diffusion of reserves throughout banking system.
The fact that the banking system as a whole may be oxpoctod to utilize
the full lending power arising out of an addition to the reserve funds of
member banks does not imoly that any individual bank can increase its lending
and investment operations by .several times the amount addod to its rosorvos.
On the contrary, a bank can lend or invost immediately only such funds as it
has, out in so far as the use of new deposits by tho depositors is by moans
of checks m
favor of other depositors without an actual withdrawal of cash,
tho additional reserves become gradually diffused throughout tho entire bank
ing system, and after a time tho growth in the aggregato deposits of all banks
becomes a3 largo as the additional reserve funds that remain after tho demand
fcr more currency has boon mot, will support.
Estimate on basis of conditions in 1924.
In estimating the probable credit expansion arising out of the addition of
^'500,000,000 to the reserve funds of member banks, let it be assumed for the
moment that the three elements under consideration, namely, individual demand
deposits of all banks, resorvo deposits of member banks, and monoy in circula
tion, will remain after the subsequent growth in the volume of bank crodit
has occurred, in the same relationship to each other as that which prevailed
at the end of Juno, 1924, the latost date for which figures for all banks are
available.
On Juno 30, 1924, individual demand deposits of all banks in the
' Unitod States were approximately $21,089,000,000 1J ; rosorvo deposits of mem
ber banks with the reserve banks wore $1,944,000,000, and money in circulation
was v‘4,755,000,000.
The ratio of deposits to reserves was, therefore, 10,8
to 1, and the ratio of deposits to currency 4,4 to 1.
The problom is how much
would be added to deposits and how much to currency if reserves increased by
&500,000,000.
With the ratios shown above remaining constant this problom can
be easily solvod.
Since both additional reserves against deposits and additional
currency would have to come out of the additional funds olaced at the disposal
of member banks, the sum of the two items must equal $500,000,000.
the growth in deposits x, then the growth in reserves will bo
.
If wo call
x
and tho
10.8
would oqual
growth m currency _ x m, , and tho sum of tho two, x
+ x
,.lK_
4 *4
10.8
4.4
v500,000,000. Solving this oquation, wo find that x = $1,563,000,000, i.o.,
individual demand deposits of all banks would incroaso by that amount; rosorvo
deposits of member banks would incroaso by 1/10.8 of that amount, or $145,000 (
'
’
000,^and currency by 1/4.4 of the amount, or $355,000,000.A Tho total additional
__/ Individual demand deposits for all banks in the United States were arrived
at by combining demand deposits subject to check, certified and cashier’s checks
an certificates of deposits subject to loss than 30 days’ notice. The unclassiie»d deposits woro distributed between domana anu other deposits in Now York State
on tho basis of tho proportion provailing among mombor banks in that Stato and fo’
tho remainder of tho country on the basis cf the proportion provailing for all 1
banks.
6.
extension of credit by banks in the form of individual deposits ($1,563,000,
000) and of currency ($355,000,000), would be $1,918,000,000, or roughly $2,000,000,000, that is, about four times the amount added to the reserves of member
banks•
Raose Qf...fluctuations in ratios of deposits to reserves and to currency.
The above calculation is based on the assumption that the ratios of individual
demand deposits of all banks to the reserve deposits of member banks and to cur
rency in circulation remained constant at 10.8 to 1 and 4.4 to 1, respectively.
What has been the actual experience with those ratios?
Below are given those
ratios for the sovon yoars 1918 to 1924:
Ratio of Individual Domand Deposits of all
Banks in the United S tat os to —
Bate
Reserve deposits of
______________member banks
June 30, 1918
1919
1920
1921
1922
1923
1924
10.1 to 1
11.6 i t t»
12.0 i t i t
11.3 i t i t
10.4 i t i i
10.1 i t i t
10.8 i t i i
Seven-year average
10.9
ii
n
Money in circulation
3.6 to 1
4.2 i i i i
4.1 i i i t
3.7 i i n
4.3 i i t i
4.0 i i i i
4.4 i t n
4.0
it
it
It will be observed that the range of fluctuation of the ratios has beon
relatively limited from 10.1 to 12 in the case of the deposit-reservo ratio, and
from 3.6 to 4.4 in case of the deposit-currency ratio.
The comparative steadiness
of these ratios indicates that a definite and fairly constant relationship has
existed during the period between individual demand deposits of all banks and the
reserve balances of member banks, and between individual domand deposits of all
banks and currency in circulation.
In faot, even if the lowest and the highest
ratios for tho period v/ere taken as a basis of calculation, the range in the re
sulting estimates of expansion would net be groat.
This calculation is made in
the following table, on the basis of a $500,000,000 addition to reserves:
.
Both ratios lowest in
seven years
Both ratios highest in
seven years
(In millions of dollars)
:Increase in
: Increase in
: individual
t
curroncy
. : donos.its.
i
:
:
'
Total increase in
credit extended
1,327
369
1,696
1,610
357
1,967
It would seem, thoroforo, that tho expansion of bank credit on tho basis of
$500,000,000 addod to member bank resorvos, on the basis of the ratios between de
posits, reserves, and currency oxisting in the seven-year period, 1918 to 1924,
would not have boon lower than $1,700,000,000 or higher than $2,000,000,000, or
at the rate of between 3.4 to 1 and 4 to 1.
iHgojjiatg and long-term adjustments.
The course of developments over the seven-year period, 1918 to 1924, indi
cates that tho existence of a cortain volume of individual demand deposits at a
given time makes it probable that the volume of money in circulation at the same
timo is about one—fourth of tho amount of deposits, and that an increase in the
volume of deposits will be accompanied by a corresponding increase in currency,
and a decrease in deposits by a corresponding decreaso in currency.
Over longer
periods of timo thoro is every reason to believe that this is true, but it does
not necessarily follow that every change in tho volume of deposits is immediately
reflected in a corresponding change on a smaller scale in money in circulation.
As a matter of fact, over the same period as that considered above, tho relation
ship between changes in deposits and in currency from year to year has net beon
V
in tbo
same proportion as that for the total volume of outstanding deposits and
currency.
Below are shown the changes in individual demand deposits and in cur
rency from year to year for the period, 1918 to 1924:
___Lin millions of dollars)________________________
jlndividual domand deposits : Money in circulation
x_____ Q.f all banks___________ ^ _____________________
Change during:
1918- 1919
1919- 1920
1920- 1921
1921- 1922
1922- 1923
1923- 1924
+
+
+
+
4,156
2,048
3,905
857
223
2.390
+
+
+
+
459
537
489
469
355
26
In most cases, but not in all, changes in deposits and in currency have beon
in the same direction, but the ratio between them has varied from 3.8 to 1 in 1919
1920 to 92 to 1 in 1923-1924.
The relative growth of deposits and money in circulation depends largoly on
the current business situation.
In 1919-1920, when prices were advancing rapidly
and business was booming, with the consoquonce that more cash was required for
pocket money and for payrolls, the increase in currency was as much as l/3.8 of
tho growth in deposits.
At tho other extreme, between June, 1923 and June, 1924,
when business activity was going through a period of recession and prices tended
downward, the growth in deposits, due largoly to gold imports, was not accompanied
by a growth m
currency.
The immediate course of dc-volopments, therefore, conse
quent upon the addition of a given amount of reserve funds to member banks would
be influenced by the prevailing business situation and there are likely to bo de
lays in the adjustment between the volume of deposits and the volume of currency.
That such an adjustment may be expected to take place in the long run, however, is
indicated by the rolativo
constancy already pointed out of tho ratio between
^regoing analysis shows that the immediate effect that an increase ' W
*
■
g'
reserve funds would have on crodit expansion would be influenced by the prevailing
business situation, v/hile, as mentioned in the beginning, the actual course of
bank; credit subsequent to tho addition to the rosorves
would bo affected by such
factors as the extent of menbor bank indebtedness at the reserve bank^, the open
market policy of these b«kjgLand the volume and direction of gold movements, .It
would be impossible, therefore, to make a definite forecast of the course of bank
crodit following an addition to the reserves available for use by membor banks. '
The present study indicates, however, that the tendency would be, in the absence of
offsetting factors for the volume of bank crodit to increase in the long run by
between 3 l/2 and 4 times the amount of increase in member bank reserve balances.
/V<
*
FEDERAL RESERVE BARKS
(In thousands of dollars)
.
Item
Reserves:
Gold
Total
April 21,
s 1926
•
•
•
• Amount
Peak
:
Date
2,795,227
2,950,470
3,167,527
3,273,542
July 23, 1924
July 23, 1924
Discounts
Acceptances
United States Securities
449,670
229,474
388,583
2,826,825
585,212
629,683
November 5, 1920
December 26, 1919
June 14, 1922
Total Earning Assets
1,081,062
3,421,976
October !
15, 1920
Federal reserve note circulation
1,662,284
3,404,931
December 23, 1920
Deposits:
Members reserve acc1t
Total
2,171,145
2,219,750
2,308,614
2,357,141
December 30, 1925
December 30, 1925
•
Page 114
Volume 157
In connection with your inquiry about the distribution
of paper pledged'with the Federal reserve agent of New York
t
v A
as collateral for Federal reserve notes, I have ascertained
ft
that on April 27 the total amount of paper pledged with the
: 77V*
Agent was ^139,000,000, of which *107,000,000 were collateral
y %
/j-%
notes, *11,000,000 were acceptances, and ^21,000,000 redis
counts •
V
Page 116
Volume 159
o m tm
J7 '
SjtA.
Attached is a very rough chart showing for the end of June of each
year from 1917 to 1925 the total volume of member bank reserve deposits
against net demand deposits of all member banks.
This figure is obtained
by deducting from the total reserve deposits that portion which represents
3 per cent of time deposits.
This figure has been divided between deposits
arising out of loans on securities and other loans and the curves for these
items are also shown on the chart.
The allocation is necessarily a rough
one and is based on the distribution of the loans of member banks between
security loans and all other loans as given in the June 30 reports of the
Comptroller of the Currency and of our own Division of Bank Operations.
I
have not tried to give figures prior to June, 1917 for the reason that, as
you remember, it was only by the June, 1917 amendments that member banks
were obliged to keep their entire reserves with the reserve banks, while
for the earlier dates when reserves were distributed between the reserve
banks and the member banks’ own vaults, it would be much more difficult
to make the allocation.
It should also be mentioned that the large amount
of reserves against security loans in 1918-1919 was due to the large volume
of loans secured by liberty bonds, representing purchases of these bonds
on deferred payments.
This class of security loans, of course, was dif
ferent from security loans made in recent years.
V/e will be glad to prepare a finished chart showing this information
in case you are interested.
P a g e 131
Volume 159
Tofa/ ffes .Depos/'jsi
Qyan’n st Pern'.
/4ao/nsf^0fi<f
^Deposits
flwmsi
&r,yn3 //]^h
Setlur 'iTy
~ o a if
.,1 9 1
Account of
settled by the Auditor-
for the
—
_______
_
---Department
, per Certificate
ft -
No. _______________ 5., dated____ ....................
f ______________ ,191
Upon a revision of the above-named account, upon the application filed _____ ______________ , 191 ,
■
o* •
1---------------------------------- - - - - ............., I certify the following difference* found by m e:
......
56—7223
—
Comptroller.
3
F orm N o. r : t .
Office Corresponaence
*
To _
FEDERAL RESERVE
BOARD
Mr. Ham lin
Date__Fay 4 , 1926,
Subject:_______
m __Pr. Smead
7e have your re q u e s t o f May 3 a d d re ss e d to Mr. G oldenw eiser r e g a r d in g
th e amount o f s a l a r i e s paid to G overnors and F e d e ra l r e s e rv e a g e n ts and th e t o t a l
c o st o f th e F e d e ra l r e s e r v e ae-ents f d e p artm en ts a s compared w ith, o p e ra tin g
d e p artm en ts o f th e b a n k s, and in a cc o rd a n ce th e re w ith a re g iv in g you th e fo llo w in g
f ig u r e s :
S a la r ie s on Y a y 1 , 1 9 2 6 o f G overnors
A gents
G overnors
A gents
B oston
'Tew York
P h ila d e lp h ia
C leveland
Richmond
A tla n ta
.2 5 ,0 0 0
5 0 ,0 0 0
2 5 ,0 0 0
3 0 ,0 0 0
2 5 ,0 0 0
2 5 ,0 0 0
$ 2 0 ,0 0 0
4 0 ,0 0 0
2 0 ,0 0 0
1 8 ,0 0 0
2 0 ,0 0 0
2 0 ,0 0 0
Chicago
S t . Louis
M inneapolis
Rhnsas C ity
D a lla s
San F ra n c is c o
T o ta l
$ 3 5 ,0 0 0
2 5 ,0 0 0
2 5 ,0 0 0
2 5 ,0 0 0
2 4 ,0 0 0
2 5 ,0 0 0
3 3 9 ,0 0 0
$ 2 4 ,0 0 0
2 0 ,0 0 0
2 0 ,0 0 0
2 0 ,0 0 0
2 0 ,0 0 0
2 4 ,0 0 0
2 6 6 ,0 0 0
'To f ig u r e s a re a v a il a b le show ing th e com plete c o s t (in c lu d in g r e n t , h e a t,
l i g h t , and g e n e ra l o v erhead) of m a in ta in in g d e p artm en ts under th e s u o e r v is io n of
th e F e d e ra l re s e rv e a g e n ts . Our r e p o r ts uo show, h o w ev er, exoenses which a re
d i r e c t l y c h a rg e a b le to each d ep artm en t under th e s u p e r v is io n of th e a g e n t as
d i s t i n c t from the o p e r a tin g d e p artm en ts o f th e b ank. Such f ig u r e s f o r th e
c a le n d a r y e a r 1 9 2 5 a r e a s fo llo w s :
F e d e ra l R eserve A g e n ts ' d e p a rtm e n ts :
S t a t i s t i c a l and A n a ly tic a l
F e d e ra l re s e rv e n o te is s u e s
Bank e x am in atio n s
T o ta l
.7 4 6 8 ,4 0 7
3 7 ,7 4 8
5 2 1 ,6 4 1
O perat ing d e p artm en ts of F e d e ra l re s e rv e baziks
(in c lu d e s s a l a r i e s o f G overnors, F e d e ra l r e s e rv e
a g e n ts and o th e r g e n e ra l overhead ex p en se s)
P r i n t i n g , s h ip p in g and redeem ing o f F. It. c u rre n c y
P ro v is io n o f space
Aud i t in g
T o ta l
• 7 1 .0 2 7 .7 9 6
2 0 ,8 1 2 , 9 3 1
1 ,8 0 2 ,9 1 8
2 ,9 3 5 ,1 1 9
6 6 3 ,4 9 0
2 7 ,2 4 2 , 2 5 4
J.s F e d e ra l r e s e rv e a g e n ts a re a ls o Chairmen o f th e Boards o f D ir e c to r s ,
i t i s im p r a c tic a b le to say ju s t what p ro p o r tio n o f t h e i r s a l a r i e s should be
ch arg ed to th e a g e n t s ’ d e p artm en ts and what p ro p o r tio n to th e b a n k s, and co n se
q u e n tly , i t has been th e p r a c t i c e f o r s e v e r a l y e a rs t o in c lu d e t o t a l s a l a r i e s o f
th e Chairmen and a g e n t s , which now amount to 7 2 6 6 ,0 0 0 p e r annum, in th e G eneral
Overhead o f th e b a n k s.
Page 150
Volume 159
w i'ii
F o rm N o . 131.
RESERVE
Office Coi
To
:©
Subject:
Jfcj
From-
•Mr
Mr. Goldenweise
In reply to your request of April 24 for statistics showing
wage increases of school teacher^ clerks, etc., compared Y/ith the
cost of living, I am pleased to transmit the attached memorandum
prepared by Mr, Thomas of this Division.
If we can be of further
assistance to you in this matter, please let me know.
Page 151
Volume 159
•OVraNMKNT PRINT INO OITICB
DD
,y« u uotju puc in usaDia rorm.
Salaries of Teachers and Cost of Living
Average Salary _1/
In
Dollars
1915
1920
1922
1924
1925
$ 543
871
1,166
1,227
— —
Cost of Living Index
Index
(1915 = 100 )
(1913 = 100 )
100.0
160.4
215.0
226.0
105.1
208.5
167.3
170.7
175.7
f
1915 » 100
10010
198.4
15911
162.4
167.2
l / Average annual salary of teachers, p rin cip als, and supervisors in
United S tates. Source: Bureau of Education.
Bureau of Labor S ta tistic s index of cost of living in the United
S tates.
Z j
vv.ww vst r<s:rft«<i.«
Z j
urnce \^u rcl
J ate
To
Mr. G oldenw eiser
From_
Mr. Thomas
_ J V \,
"‘v’ #
Subject:.
A
f
In re g a rd to Mr, H a m lin ^ re q u e s t on
concerning s a l a r i e s o f te a c h e r s , c l e r k s , and the l i k e , I have been
a b le to secu re lim ite d in fo rm a tio n .
The ta b le below g iv e s av erag e
annual s a l a r i e s of te a c h e r s , p r i n c i p a l s , and s u p e rv is o rs a s re p o rte d
by the Bureau o f E d u catio n f o r c e r ta in y e a r s .
Cost o f l i v i n g indexes
a re shown f o r c o rre sp o n d in g y e a rs and both s a l a r i e s and c o s t o f liv in g
have been reduced to a comparable base w ith 1915 e q u a lin g 1 0 0 .
The s t a t i s t i c s on c l e r i c a l p o s itio n s so f a r a s I can determ ine a re
not a v a ila b le .
The Bureau o f E f fic ie n c y has c o lle c te d f ig u r e s which
may throw some l i g h t upon t h i s s u b je c t, b u t t h e i r s t a t i s t i c s have not
y e t been put in u sa b le form .
S a la rie s o f Teachers and Cost o f Living
Average S a la ry
In
D o lla rs
1 9 15
1920
1922
1924
1925
# 54 3
871
1 ,1 6 6
1 ,2 2 7
1/
Index
(1 9 1 5 = 1 0 0 )
100.0
1 6 0 .4
2 1 5 .0
2 2 6 .0
Cost of Living Index
( 1915 = 1 0 0 )
f 1915 « 1 0 0 )
1 0 5 .1
2 0 8 .5
1 6 7 .3
1 7 0 .7
1 7 5 .7
10010
1 9 8 .4
15911
1 6 2 .4
1 6 7 .2
1 / Average an n u al s a la r y of te a c h e r s , p r i n c i p a l s , and s u p e rv is o rs in
U n ited S ta te s . Source; Bureau o f E d u c a tio n .
j
Bureau o f Labor S t a t i s t i c s index of c o s t o f liv in g in th e U n ited
S ta te s .
2
.»vrv.'-iYvkv rwHviiW ’»
2/
•
•
A
COMPARISON BETWEEN FEDERAL RESERVE BANK OF NEW YORK AND
FEDERAL RESERVE BANK OF CHICAGO WITH SELECTED CENTRAL BANKS OF EUROPE
Bank Statement nearest March 31, 1926
:
: Loans, : Total
: Ratio of
: Total
:Discounts: note and : reserves to
:Reserves
and
deposit
: note o.nd de:
rl^See^iliabilities: posit liabilities
Banks
(In thousands of dollars) l/
New York F. R. Bank
Bank of England
Bank of France
German Reichsbank
1,049,999
(Per “cent)
207,15#
1,288,043
81.5
713,664
696,966
2/ 204,640 1,682,106
469,396
585,666
1,321,676
1,920,004
900,840
54.0
10.7
52.1
310,019
186,870
475,584
65.2
National Bank of Belgium 11,342
Bank of Italy 3/
66,009
Netherlands Bank
242,937
Nat!1 Bk of Switzerland 86,772
283,280
638,996
89,171
70,392
299,497
622,126
343,095
169,012
3.8
10-.6
70.8
51.3
Chicago F. R. Bank
3/
Converted at current rate of exchange on March 51, 1926
Gold reserves
Statement of March 20, 1926
\
@FedFRASER