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The Papers of Charles Hamlin (mss24661)
360_13_001-




Hamlin, Charles S., Scrap Book — Volume 176, FRBoard Members




205.001 - Hamlin Charles S
Scrap Book - Volume 176
FRBoard Members

/ '2

CONFIDENTIAL (F,R.)

BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM

Office Correspondence
To

The Files

From

Mr. Coe

Date

July 17, 1941

Subject:

iY\Rs-cAfter correspondence with Mrs. Hamlin (see letters of May
25 and June 4, 1941) the items attached hereto and listed below,
because of their possible confidential character, were taken from
Volume 176 of Mr. Hamlin's scrap book and placed in the Board's
files:
VOLUME 176
Pages 4 & 8
Letter to Mr. Case from Gov. Young re Open Market Committee.
Page 6
Letter from Mr. Harrison to Gov. Young.
Page 9
Memo to Mr. Hamlin from Mr. Smead re Income of F.R. Banks classified as to source, compared with expense and dividend
payments.
Page 10
Memo to Ir. Eddy from Mr. Smead re Bank Suspensions - Year 1927.
Page 27
Memo for the Open Market Inv. Committee - January 12, 1928.
Page 29
Report of the Sec'y to the Open Market Inv. Committee meeting
held in Washington, January 12, 1928.
Page 66
Memo to Mr. Hamlin from Mr. McClelland re changes in discount
rate of the F.R. Bk. of N. Y. made during the years 1925,
1926, and 1927.
Page 71
Letter from Mr. Goldenweiser to Mr. Curtiss.
Page 101
Memo to Mr. Hamlin from Mr. Smead re Domestic acceptances.
Page 117
The Reserve Banks, Gold and Money Rates by Mr. Goldenweiser.
Page 127
Memo for directors of the F.R. Bk. of Richmond by Geo. J. Seay,
re Responsibility of the Federal Reserve System for the
Present condition of credit inflation.




444,

40-4.04
T'ne Committee has considered, the memorandum sullmitted by the
,as re,riewed th
Oboirraan and '

prop:tarn adopted by the cornitt,ee on

.,,Tove-.-aber 1, 1927 and approved by the s:4:sedern1 Reserve noard.

Thereu7on,

the following conclusions were a.dontedt
1. The object of the nolicy ado-lted. on November 1 lias
be -in accomplislieci.
2.

The Oortnittee program should now work towards SOMC-

ithat firmer money conditions as far as necessary to :fleck unduly rapid farther increases in the volume of credit.
3.

In order to accormlish this progran the corrlittee

would ex-oect to sell further amounts of Oovernment securities
and if necessary to deal with f7old :itoverarrnts in such manner as
necessary to er...rry out the progran.
As outlined in the prograr.1 of November 1, the
co_uittee would exlect to be charged with the execution of this
proexara for the account of those reserve banks which apnrove
and participate and moul4 hole this nrograr, mirht

f.p..ide

the

connittee for the ',resent, unless a change of conditions -lakes
further review drsirable.

VOLUME 176
PAGE 4




January 12, 1928.

Dear )12'. Case:
At the meeting of the Board this morning,
a.:ter the.members of the Open Earket Committee had
retired. the Board unanimously adopted the following
motio"
"The Federal iieserve Board authorizes the
Open llarket Investment Committoe during
the next two months to rake sales of
Government securities from time to time
with accompanying authority temporarily to
purchase such securities should developments not now in si7ht require such action."

Very truly yours,

A. Young,
Governor.

Lir. J. H. Case, Acting Chairman,
Open Market Investment Committee,
c/o Federal eserve Bank,
New York, N. Y.

VOLUME 176
PAGE 8







The Committee has considered the memorandum submitted by the
Chairman and ha reviewed the program adopted by the committee on
November 1, 1927 and approved by the Federal deserve Board.

There-

upon, the following conclusions were adopted:
1. The object of the policy adopted on rovember 1 has
been accomplished.
2.

The Comnittee program should now work towards some-

what firmer money conditions as far as necessary to check unduly rapid further increases in the volume of credit.
3.

In order to accomplish this program the committee

would expect to sell further amounts of Government securities
and if necessary to deal with gold movements in such manner
as necessary to carry out the program.
As outlined in the program of November 1, the committee would expect to be charged with the execution of this
.program for the account of those reserve banks which approve
and participate and woald hope this program mirilt guide the
committee for the present, unless a change of conditions makes
further review desirable.

S

COPY

64(

(From letter of 11r. leorge L. Harrison
• Deputy Governor)
FEDERAL RESERVE BANK
OF NEW YORK

January- 10, 1928,

Dear Governor Young:
While you no doubt have all the figures available in :our
records at the Board, nevertheless I thought it might be convenient
briefly to review the gold movements during the year 1927 and for the
first ten days of this month.

With that in mind, I am enclosing a table

showing by countries the total imnorts and exports as veil as earmarks
and releases for the year 1927.

From this table you will observe tnat

aggregate shipments to tne United States, most of which were in the early
months of the year, were approximately $2070600,000, whereas the total
exnorts from the United States were $199,600,000, of which the greater
part were in the latter -part of the year.

If, therefore, we consider

only tne actual movements of gold, the net gain to our gold stock was

$8,000,000, but as an offset, it will be observed that net earmarks
during tne year a.aounted to $160,600,000, mad.ng a net loss through
,=ixnorts and earmarks amounting to $152,600,000 for the whole year.

These

figures are the best that we nave available and must be subject to some
slight adjustment when the final figures for the whole country for tne
month of December are'received.

VOLUME 176
PAGE 6




1.64- 114t

-Florin Igo. 131.
•

Office Correspondence
To

_Kr. Ham14r
Smead,

FEDERAL RESERVE
BOARD

Date,

January 10, 192g.

Subject: Inzome of Federal reserve ban,
classified as to source, compared with
expense and dividend payments.
2-8496

In accordance with your request we have prepared the attached
tables thawing the relationship existing between earnings on the several
classes of earning assets and expenses and dividend payments of the Federal
reserve banks, singly and combined, since their organization. The earnings
of some of the Federal reserve banks were not sufficient to cover all accrued
dividends until 191, and consequently in compiling the attached tables, we
have combined the figures for the period 15111-191S, inclusive, but beginning
with 1519 have Shown figures for each year.
For the System as a whole the ratio of earnings on discounted bills
to total expenses and dividend requirements has no particular significance,
so far as the ability of the Federal reserve banks to cover their expense and
dividend requirements is concerned, since the amount of earnings on discounted
bills is governed very largely by the extent to which the system engages in
open-market operations. 'When it comes to individual Federal reserve banks,
however, and especially those in the agricultural sections of the South and
the Middle West, the ratios of earnings on discounted bills to total expense
and dividend requirements are more or less indicative of local requirements
for Federal reserve credit. It is interesting to note, however, that earnings
of all Federal reserve banks on discounted bills for the period from their
organization to the end of 1927 amounted to about 1-1/3 times expense and
dividend requirements, notwithstanding the fact at the System has, especially
in recent years, carried a substantial volume of acceptances and United States
securities.
During the war and early post-war period, earnings on discounted
bills were :ouch in excess of total expense and dividend requirements, While
since that time they have amounted to only about one-half of expense and
dividend requirements. The ratios for the different banks naturally vary
considerably, the lowest ratio for 1527, that of Minneapolis, being 10i per
cent, and the highest, that for Atlanta, 73.7 per cent.

VOLUME 176
PAGE 9




GROSS INCOME ACCORDING TO SOURCE, AND EXPENSE AND DIVIDEND PATENTS, OF THE FEDERAL RESERVE BANKS, 1914-1927.
(In thousands of dollars)

Federal Reserve Bank
ALL F. R. BANKS COMBINED

Gross Income
Earnings onlEarnings on Earnings on! All I
discounted I purchased
Iother ! Total
U. S.
I
bills
securities
bills
''
_1income

i

Ratio to exrense and dividend
1
Expenses !Earnings onlEarnings onlEarnings on
1 e'
l,r
discounted 1 purchased ! Ur. S.
di ends 1
bills 'securities
1. bills
1..
--7
TPer cent
105,047 31,420 775,087 401,527
131.9
26.2
27.1

529,656

108,964

34,287

10,655

5,931

1,650 52,523

27,513

124.6

38.7

161,282

32,438

26,648

5,597 225,965

94,951

169.3

Philadelphia

40,528

6,540

8,023

1,706 56,302

29,532

Cleveland

39,215

12,593

10,995

2,791 65,594

Richmond

30,981

2,959

2,012

Atlanta

28,763

14,350

2,622

Chicago

78,23(3

13,427

14,855

St. Louis

24,041

3,139

Minneapolis

17,038

Kansas City

-,1

a ents of All
Gross
Income
zle
income
7.3

193.0

21.6

6.0

190.9

34.1

23.1

5.9

237.9

137.0

22.1

27.1

5.8

192.0

37,563

104.4

33.5

29.3

7.4

174.6

1,652 37,604

20,630

150.2

14.3

9.3

8.0

182.3

1,173 36,913

19,594

146.3

22.2

13.4

6.0

138.4

111,572

55,179

141.8

24.3

26.9

9.2

202.2

5,532

1,407 34,119

21,522

111.7

14.6

25.7

6.5

158.5

2,813

4,700

2,008 26,559

15,353

111.0

13.3

30.6

13.1

173.0

24,343

2,587

8,835

3,234 39,004

24,066

101.2

10.7

36.7

13.4

162.0

Dallas

16317
,

,
3586

5169
,

2833
,
28455
,

19,926

34.4

180
.

259
.

145
.

142.3

San Francisco

34,115

13,378

9,720

2,259 59,972

35,644

95.7

39.0

27.3

6.3

i.3

Boston
New York

5,051

NOTE: "All other income" includes additions to current net earnings and "Expenses and dividends" includes deductions from
current net earnings.




•

•

GROSS INCOME ACCORDING TO SOURCE, AND EXPENSE AND DIVIDEND PAYNYSTS, OF THE FEDERAL RESERVE BANKS SINCE ORGANIZATION.
(In thousands of dollars)
Gross Income
Ratio to expense and dividend payments of kxns
e es Earnings
Federal Reserve Bank Earnings SionlEarnings onlEarnings on! All
on Earnings onlEarnings onl All
Gross
discounted 11 purdhased ! U. S. !other Total 1 and
and year
discounted purchased 1 U. S.
lother
dividends
income
bills
bills
'securities
1
'income
bills
bills
securities 'income
(Per
cent)
ALL F.R.EANKS GOISINED:
1914-1918
57,564
18,697
7,475
7,533 91,269
4o,667
141.5
46.o
18.5 224.4
ig.4
1919
go,76g
13,994
5,761
2,116 102,639
29,2g4
275.s
47.g
7.2 35o.5
19.7
192o
149,060
22,020
7,141
3,947 182,168
38,527
3g6.9
57.2
18.5
10.2 472.g
1921
5,234
109,599
6,254
2,270 123,357
47,389
231.3
11.0
13.2
4.g 260.3
1922
26,523
as 51,g3g
5,629
16,682
41,64s
63.740.1
7.2 124.5
1923

32,9569,371

1925
1926
1927

17,680
22,552
17,011

9,104
10,003
9,202

12,7g3
12,589
14,206

BOSTON
1914-191g
1919
192o
1921
1922

693
0,003
lo,o31
6,007
1,544

1,720
1,07g
1,613
515
592

266
369
554
416
1,392

69g 6,377
47 7,497
140 12,33g
I.
7g
56 3,5g4

3,306
2,134
2,513
3,2oc
2,967

1923
1924
1925
1926
1927

2,321
7g3
1,19g
1,464
1,243

741
599
1,493
1,279
1,025

420
1,050
455
402
607

51
147
146
ig3
104

3,533
2,579
3,292
3,32g
2,979

2,761
84.1
26.g
2,5g7
30.3
23.2
2,05456.3
2,696
54.3
47.4
2,692
46.2
38.1

20,266
29,936
49,839
30,762
3,970
8,256
2,613
5,1g9
5,g37
4,614

7,883
3,335
8,323
1,330
1,620

2,022
1,ggg
1,976
1,956
5,227

1,532
204
762
166
535

31,703
35,363
6o,915
34,714
11,352

9,936
8,695
9,249
10,229
9,283

204.0
344.3
538.9
300.7
42.g

79.3
38.4
9o.o
17.9
17.5

1,970
1,447
1,470
2,002
2,55g

1,0g7
4,166
2,9g5
2,3go
2,961

102
519
579
557
641

11,415
8,745
10,223
10,776
10,774

10,120
9,925
9,007
9,126
9,3n.

81.6
26.3
57.6
64.o
49.2

19.5
14.6
16.3
21.9
27.3

1924

1.2w YORK
1914-1918
1919
192o
1921
1922
1923
1324
1925
1926
1927



15,943

5,710

7,444

14,712

1,167
2,53o
2,714
2,786
3,353

50,93s
3g,g95
42,2s1
,_
43,772

44,7go
73.6
20.9
41,86013.6
39,74722.9
38,647
5g.4
25.9
38,978
43.6
23.6

16.6
35.1
32.2
32.6
36.4

2.6
6.0
6.g
7.2
8.6

113.g
92.9
I.
124.o
112.2

4

s.1
52.o
21.1 192.9
2.2 351.3
5o.5
17.3
64.2491.0
16.1
2.4 218.7
13.0
20.0
1.9 120.g
46.9

111.7
281.3
399.2
187.3
52.0

'

15.2
40.6
17.1
14.9
22.5

1.8
5.7
5.5
6.8
3.9

128.0
99.7
124.0
123.4
110.7

20.4
21.7
21.4
19.1
5.3
10.7
42.o
33.1
26.1
31.6

15.4
2.3
g.2
1.6
5.8

319.1
406.7
65g.5
339.3
122.3

1.0
5.3
6.4
6.1
6.s

112.g
gg.1
113.5
118.1
114.9

1

GROSS INCOME ACCORDING TO SOURCE, AND EXPENSE AND DIVIDEND PAnENTS, OF THE FEDERAL RESERVE BANKS SINCE ORGANIZATION.
(In thousands of dollars)
Federal Reserve Bank
and year

Income
Gross
Earnings onlEarnings oniEarnings oni All 1
discounted 1 purdhased
U. S.
other
Total
(securities income
bills
bills

Ratio to expense and dividend payments of Expenses lEarnirEs onTEarnings on Earnings on All
and
Gross
U. S.
discounted
other
purdhased
income
dividendsj
bills
1
securities income
bills
(Fer cent)

PHILADELPHIA
1914-1918
1919
1920
1921
1922

3,660
7,988
10,420
6,850
2,394

1,459
67
574
514
712

447
)496
742
598
1,119

470
63
258
182
109

6,036
8,614
11,994
8,144
4,334

3,428
2,417
3,426
3,32?
2,639

S.
330.5
304.1
206.2
S.

42.6
2.E4
16.g
15.5
27.0

42.4

1923
1924
1925
1926
1927

2,693
1,290
1,548
2,037
1,648

953
4og
587
I.
I.

910
1,136
846
764
97o

56
103
156
165
144

4,612
2,937
3,137
3,62g
3,366

3,017
2,806
2,731
2,825
2,971

89.3
46.0
56.7
72.1

55.5

31.6
14.5
21.5
23.4
2o.3

30.2
40.5
31.0
27.0
32.7

CLEVELAND
1914-191g
1919
1920
1921
1922

3,550
5,342
10,571
8,042
2,247

1,757
1,883
3,o64
737
744

1,090
450
603
4go
1,947

764
126
284
257
lo5

7,161
7,801
14,522
9,516
5,043

3,6os
2,264
3,3o6
3,892
3,467

98.4
236.o
319.7
206.6
64:s

4s.7
83.2
92.7
18.9
21.5

30.P
19.9
18.3

2,326
1,362
1,898
2,212
1,665

1,512
67c
7o3
818
705

74o
1,582
1,245
1,274
1,584

89
196
501
224
245

4,667
3,gi0
4,347
4,528
4,199

4,471
5,040
3,915
3,676
3,924

52.0
27.o
48.5
60.2
42.4

33.8
13.3
17.9
22.2
18.0

16.6
31.4
31.g
34.7

3,342
4,100
5,921
6,166
2,570

505
351
477
185
75

219
185
277
196
96

389
198
259
193
105

4,455
4,834
6,934
6,740
2,846

2,141
1,211
IS
2,670
2,311

156.1
338.5
297.7
23o.9
111.2

23.6
29.o
24.o
6.9
3.2

10.2
15.3
13.9
7.4
4.2

2,682
1,905
1,721
1,676

63
4g
217
374
I.

4o
165
154
261
419

97
95
91
118
107

2,882
2,213
2,183
2,429
2,08g

2,130
2,184
1,965
2,066
1,963

125.9
87.2
87.6
31.1
45.8

3.0
2.2
11.1
18.1
33.g

1.9
7.6
7.g
12.6
21.3




g9g

13.0
20.5
21.7
18.0

13.7
2.6
7.5
5.5
4.1

176.1
356.4
350.1
245.2

164.2
152.9 Am
104.7 ‘11.
114.9
128.4
113.3

21.2
g r,

12.4
56.2

40.4

•

208.1
399.1
348.6
252.4
123.1
4.5
4.3
4.6
5.7
5.5

135.3
101.3
111.1
117.5
106.4

GROSS INCOME ACCORDING TO SOURCE, AND EXPENSE AND DIVIDEND _PAYMENTS, OF THE FEDERAL RESERVE BANKS SINCE ORGANIZATION.
(In thousands of dollars)
Fe era, Reserve Bank
and year

Income
Gross
(
:Earnings on!Earnings onlEarnings on All
other
U. S.
discounted 1 purchased I
!securities ,income
I
bills
bills

ATLAN A
1914-1918
1919
1920
1921
1922

2,362
3,735
6,688
6,624
1,952

1923
1924
1925
1926
1927

1,998
1,532
912
1,705
1i 255

CHICA 0
1914-1918
1919
1920
1921
1922

Total

Ratio to expense and dividend payments of Expenses Earnings onlEarnings onlEarnings on All
Gross
and
discounted
other i .
purchased 1
U. S.
income
iv
didends
',bills
Di
bills
securities income
(Per cent)

457
367
338
155
165

296
229
321
533
189

284
101
150
104
51

3,399
4,432
7,497
7,416
2,357

1,849
1,248
1,712
2,165
1,941

127.7
299.3
390.6
305.8
100.5

24.7
29.4
19.8
7.2
8.5

16.0
18.3
18.7
24.6
9.7

15.4
8.1
8.8
4.8
2.6

183.8
355.1
437.9
342.4
121.3

550
234
727
1,025
332

go
85
371
228
290

57
70
69
101
191

2,685
1,921
2,079
3,059
2,068

2,598
1,921
2,329
2,127
1,704

76.9
79.8
39.2
80.2
73.7

21.2
12.2
31.2
4E1.2
19.5

3.1
4.4
15.9
10.7
17.0

2.2
3.6
3.0
4.7
11.2

103.4 A
100.0 q
89.3
143.8
121.4

7,604
8,916
25,727
18,829
3,862

1,773
2,142
2,989
375
547

1,034
736
995
858
2,081

1,090
218
661
325
830

11,501
12,012
30,372
20,387
7,320

4,870
4,137
5,290
6,736
6,792

156.2
215.5
486.2
279.6
56.8

36.4
51.8
56.5 '
5.6
8.1

21.2
17.8
18.8
12.7
30.6

22.4
5.2
12.;
4.i4
12.2

236.2
290.3
574.0
302.7
107.7

1923
1924
1925
1926
1927

3,872
2,044
2,122
3,016
2,247

1,420
706
1,055
1,231
1,189

1,050
2,122
1,834
1,930
2,215

211
358
426
403
529

6,553
5,230
5,437
6,580
6,180

6,279
5,230
5,256
5,312
5,283

61.7
39.1
40.4
56.8
42.5

22.6
13.5
20.1
23.2
22.5

16.7
40.6
34.9
36.3
41.9

3,4
6.8
8.1
7.6
10.0

104.4
100.0
103.5
123.9
116.9

ST. LOUIS
1914-1918
1919
1920
1921
1922

2,676
2,918
6,382
4,739
1,304

483
565
274
41
256

277
320
392
284
832

397
gl
152
115
71

3,833
3,884
7,200
5,179
2,463

2,232
1,764
2,578
2,498
2,698

119.9
165.4
247.6
189.7
62.1

21.6
32.0
10.6
1.6
12.2

12.4
18.2
15.2
11.4
39.7

17.8
4.6
5.9
4.6
3.4

171.7
220.2
279.3
207.3
117.4

1923
1924
1925
1926
1927

1,969
1,141
838
1,258
816

253
142
454
340

521
353
712
841
1,000

91
68
111
gg
233

2,834
1,704
2,115
2,527
2,380

1,949
1,805
2,516
2,159
1,923

13.0
7.9
1.1
15.7
17.2

26.7
19.5
2.3
39.0
52.0

4.7
3.8
4.4
4.1
12.1

145.4
94.4
84.1
117.1
123.7




-

331

101.0
63.2
33.3
58.3
42.4v

4

Mow
GROSS INCOME ACCORDETG TO SOURCE, AND EXPENSE ANT DIVIDEIMS PAYMinTS, OF THE FP,T)ERAL A262RVE BANKS SINCE ORGANIZATION
(In thousands of dollars

- a-

Reserve Eank
and year

Gross Income
Earnings onlEarnings on,Earnings on All
discounted 1 purchased
U. S.
other
bills
1
securitiestAncome
bills

,
Total

Ratio to expense and
dend nmments of IExls
Sarnings onlEarnings onlEarnings on All
and
Gross
discounted I purchased 1
other
U. S.
dividends
income
bills
I bills
!securities [income
(Per cent)

MMEAPOLIS
1914-191g

1,972

415

3,o77

1,829
4,734
4,650
1,452

sg3
192
, -

302
213
1g2
142

3gg

1919
192o
1921
1922

82
216
192

3,007
5,324

1,625
853

121.4
214.3

25.5
103.5

ig.6
25.o

1,3g9

3110.8

13,g

4,984

13.1

2,044

227.5

384

175

-

2,011

1,442

100.7

-

66.2
35.0
16.1

6.9

23.9
I.
15.6
9.4

189.4
352.4
383.3
243.8.

26.6

12.1

139.4

1.9
5.1
3o.7

31.7
51.3
47.1

7.0
16.3
9.0

106.g
107.7
102.9
118.0

1923

1,0g9

31

521

1924
1925
1926

579
231
310

s4
441
I.

g4g
677
723

116
269
129
263

1,757
1,780
1,478
1,702

1,645
1,653
1,436
1,442

1927
KANSAS CITY
1914-191g

192

178

1,439

1,823

Pg.2
19.8

50.1

708

21.5
10.5

18.2

361

38.g

0 7,

563
474

4,937
5,109

2,516
1,415

128.4
274.8

14.6
24.1

3o.g
28.6

22.4
33.5

196.2
361.0

3,231

367

776

1919
1920

3,889
6,441

341

405

5,134

P12
49

505

1921

1922

1,493

9

1,409

2g6

1923
1924

1,794
g6o

1925

362

926
1927

643
501

29
15g
538
508
376

DALLAS
1914-1918

971
948
1,118
1,214
1,106

204
315
305
.3.9
327

2,154

1921
1922

2,444
4,045
3,830
1,609

325
113
73
g
198

377
229
271
171
195

1923
1924

1,170
531

826
631

P68
782

1925
1926
1927

253
526
255

523
463
426

940
986
950

1919
1920




-

252
1g9

7,410

2,128

302.7

10.0

23.7

5,755
3,197

11.g

348.2

2,968
2,689

173.0
55.5

1.6
.3

12.9
52.4

6.4
10.7

193.9
118.9

33.2
33.9
48.6
55.7

7.0

102,5

11.2

81.5

13.3
14.6

101.1
123.1

2,998

2,926

61.3

2,2g1

2,800

30.7

2,323
2,684

2,299
2,179

15.8
29.5

1.0
5.7
23.4
23.3

2,310

2,14g

23.3

17.5

51.5

15.2

107.5

427
276
532
231
503

3,283
3,062
4,921
4,240
2,50!5

2,o98

102.6

ig.o

20.4

156.5

1,217

200.8

lg.g

22.7

251.6

1,918
2,879
2,403

210.9
133.0
67.0

15.5
9.3
3.g
.3

14.1
5.9

27.7
8.0

256.5
147.2

g.2

8.1

20.9

104.2

114
261
102

2,37g
2,205
1,818

2,298
2,190
1,794

50.9
24.3
14.1

35.9
2g.g
29.1

11,7

5.0

103.5

35.7
52.4

159
27g

2,134
1,909

1,533
1,596

34.3
16.0

30.2
26.7

64.3
59.5

11.9
5.7
10.4
17.4

100.7
101.3
139.2
119.6

•

GROSS.IMME ACCORDING TO SOURCE, AND EXPENSE AND DIVIDEND PAYMTS, OF THE FEDERAL RESERVE BANKS SINCE ORGANIZATION

Federal Reserve Bank
and year

(In thousands of dollars)
Gross Income
Ratio to expense and dividend payments of Expenses Earnings
Earnings on!Earnings ontEarnings on! All
onlEarnings onlEarnings on! All ! Gross
and
discounted I purchased
discounted I purchased
other !
U. S. 'other Total dividends
U. S.
lsecurities !income
bills
bills
bills !securities 'income! income
bills
I
(Percent)

SAN FRANCISCO
1914-1918
1919
1920
•
1921
1922

3,054
3,68
8,260
7,966
2,127

1,553
2,870
3,890 '
826
712

369
238
323
237
1,811

531 5,507
245 7,021
280 12,753
237 9,266
177 4,827

3,058
1,930
3,029
4,780
3,615

99.9
190.0
272.7
166.6
58.8

50.8
148.7
128.4
17.3
19.7

12.1
12.3
10.7
4.9
50.1

17.3
12.7
9.2
5.0
4.9

180.1
363.7
421.0
193.8
133.5

1923
1924
1925
1926
1927

2,786
1,302
1,408
1,867
1,677

1,021
582
896
897
631

837
1,476
1,447
1,586
1,396

-20

4,624
3,487
3,850
4,557
4,080

4,586
3,718
3,850
3,507
3,571

60.7
35.0
36.6
53.2
46.9

22.3
15.7
23.3
25.6
17.7

18.2
39.7
37.6
45.2
39.1

-.4
3.4
2.5
5.9
10.5

100.8
93.8
100.0
129.9
114.2

•




127
99
207
376

21

St. 5640

S4L/1A

Janu, 14, 1928.
To:

Mr. Eddy

SUBJECT:
C 0 N

From: Mr. Smead

Bank Suspensions - Year 1927

IDENTIAL

There is given below a summary of bank suspensions during the year 1927
with comparative figures for the years 1921-1926. The figures shown for 1927 are,
of course, pieliminaLy, and while it is not thought that the number of suspensions
will change materially, it is expect -that the deposit figures will be reduced 15
or 20 million when final information is received.
BANK SUSPENSIONS
All banks
Numberl Capital i Deposits

Year

1926
1925
1924
1923
1922

661
956
612
777
650
354

1921

502

1927

I Tumbe r

$25,349,000 $228,006,0001
32,804,000 272,488,000
24,441,000 172,900,000
28,373,000 213,444,000
21,978,000 188,805,000
13,743,000 110,721,000
22,902,000 198,354,000

1927
1926
1925
1924
1923

1922
1921

State member banks
Deposits
Capital

33
35

1927
1926
1925
1924
1923
1922
1921

Year

28

37
3)4
12
19

2,619,000
2,549,000
1,950,000

2,645,000
2,235,000
621,000
2,309,000

21,435,000
20,946,000
8,727,000
13,530,000
18,324,000
5,151,000
21,218,000

1927
1926
1925
1924
1923

National banks
Deposits
Number' Capital

I

92
125
118
122

$5,490,000 $49,258,000
6,020,000 47,866,000
7,970,000 58,537,000
7,660,000 60,889,000

90
45
51

4,610,000 32,904,000
3,335,000 19,092,000
3,060,000 21,285,000

Nonmember banks
Capital i Deposits
I Number
536 17,240,000 157,313,000
796 24,235,000 203,676,000

466

14,521,000 105,630,000

618
526

13,068,000 133,975,000
15,133,000 137,577,000
9,787,000 86,478,000
17,533,000 155,851,000

1922

297

1921

432

=ER OF BANK SUSPENSIONS BY FEDERAL RESERVE DISTRICTS AND BY STATES
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total
States
Iowa
Minnesota
Missouri
Texas

1927
1
2

1926

1925
2

27

14
9

3
14

43
62

61
162

63
44

126
82

182

109

77

53

142
100

283
112

163

Wi
32

50
16
955

661

77
50
24
612

1924
1
6

1923
3
14

1922
2

3
1
1

)43
146
los
53

44
23
53
24

36

295
133

279
137
46"
2$

64
92
51

650

354

35
45

12

24

14

13

20
21

11
31

17
69

76
16

106
34

10
20

36
14

3
14

4
5
54
45
17
7

5
4

5
10

)43.
9
23
7

27
3

53
29
777

22

25
26

31

20

3

28
27
25
25

21
115
18

6)4
12

7

lo

49
111
17
4

All other

202

304

227

276

257

167

Total

661

956

612

777

650

354

North Dakota
Kansas
Florida
Illinois
Oklahoma
South Dakota
Nebraska
Indiana


C.


21

2

3
6

2

59
46
43

135
92
53
33

6
6

6

s4
50
45
39
32
19
1

70
65
48
38
37
36
30
30

1921

33

55
43
30

5
4o
66
46
33
73
67
82
56
502

28

7
249
502

VOLUME 176
PAGE 10

1,4,A44
.Z7
MEMRANDUM FOR THE OPEN MARKET INVESTMENT COMMITTEE

loe

January 121 1928

The major features of the current credit situation as they relate
to Federal Reserve policy may be summarized as follows:

VOLUME OF CREDIT
Over the past 12 months the growth of bank credit in the United States
has been more rapid than in any year since 1924, and more rapid than is ordinarily required by the year to year growth in the country's trade.

It appears

to have been much more rapid than was required by the growth of trade this year
in view of recessions in many branches of business.
As far as may be judged from the available statistics the country's
bank credit expanded about 8 per cent in 1927 compared with a normal growth of
possibly 6 per cent.

USE OF CREDIT
The amount of commercial loans as indicated by "all other loans" of
reporting member banks, is now no larger than a year ago.

The increase in

total loans and investments of these banks was divided almost equally between
loans on stocks and bonds and bank investments.

Of the increase in investments

more than half has been in Government securities, reflecting in part the Treasury
r funding program which retired three billion dollars of widely distributed bonds
largely by issuing lower yield short term issues which were carried more largely
banks,
In interpreting these member bank figures two other considerations
should be borne in mind.
1.

"All other loans" are not a complete measure of business
-Use of credit.

Much of the funds recorded as investments

and loans on stocks and bonds find their way into business
VOLUME 176
PAGE 27



2
use.

Through new financing for example, this year

about 6

billion dollars has gone into construction

of building, roads, bridges, plant equipment, etc.
Business credit requirements of these sorts continue
to grow even in periods of recession and these uses
of credit are a factor ia business recoveries from
recessions.

In the banking figures some of this ap-

pears in investments and loans on stocks and bonds.
2.

ents
With our huge time deposits some considerable increm
of bank credit are due to accumulation of interest.

The

country has perhaps 26 billions of time and savings deposits.

Annual 4 per cent interest on this sum is over

one billion dollars.
has been in demand
But nearly half of the increase in deposits this year
credit has been abrather than time deposits, and much of the increase in bank
ss
sorbed in increased prices of securities rather than in busine

enterprise.

than can be continued
. The rate of increase in credit has been clearly more rapid
readjustment of which
without leading to abnormalities of value, the eventual
might involve a severe strain on the country's business.
member banks are
The changes in the loans and investments of reporting
shown in the following diagram.




/928

BILL JOAOQ/POLLA RS

BILLIONS(y7X)LLA
9.6

LOANS on
STOCKS & BONDS

COMME CAL
LOA
9.2,

6.4

8.8

6.0

192 7
4928

1927

8.4

5.6
1.926

8.0

5.2
Jr

MAPIJ

J

A.5

sTFMANJJ

OND

BILLIONS(y-DOLLA R5

,
A

SOND

BILLIOIK5olDOLLARS

22_J289

6.8

7
TO TA L.

INVESTMENTS

LOANS &INVESTMENTS

/928
6.4 —a

21
1927
1927
6.0
20
5.6
1926

5.2.

I
J

."--45--I-----•

g

1_
FMAMJJ




1926

A

SOND

J

_
FMAMJJASOND

Loans and Inv es tmen ts of A11 Weekly Reporting Banks

4
CONDITION OF BUSINESS
ng
Recent changes in business activity are summarized in the followi
compiled by the
diagram which gives the components of the volume of trade index
New York Bank.

trend
In each case the figures are shown as percentages of the

of growth of past years.

The principal recessions have been in productive

activity and wholesale (primary) distribution.

Retail distribution has been

stocks, new
better sustained and financial activity which includes sales of
going forward at
financing, and trading in cotton and grain futures, has been
a tremendous pace.

ed
This very high rate of financial activity has account

such high levels.
for the fact that debits to individual accounts have been at
they do not
Jhile the figures show a distinct recession in business
show anything approaching a depression.

In none of the groups are the figures

appreciably below what may be estimated as normal,

Jhile industrial employ-

no indications of
ment has decreased 5 or 6 per cent since a year ago there are
serious unemployment.




PER CENT

PER CENT

150

150

125

125

100

100

75

75

ODUCTIVE ACTIVITY

PR MA Y DIISTRIBUTION
50

50
1919 '20 '21

'22

23

'24 '25 '26 '27

1919 20

'28

PER CENT

2.1

'22 '23 '24 '25 '26

'27

'28

PER CENT

150

250

FINANCIAL ACTIVI Y
12.5

200

100

150

75

100

DIST- fo CONSUMER
50

50
1919 '20




'21

'22. '23 '24 '25 '26 '27 '28

1919 '20

'21

'22

23 '24 '25 '26 '27 '28

PER CENT,

150

INDEXES

12.5

PRODUCTION, D/5TR1-

501/ON, €.4 FM/ANC/AL ACTIV/TY.
a °A of conipuled /rend)

O

FR 13 of N.Y

100

75

GE

U5INE55 ACT V17

50

1919 '20 '21 '22. '23 '24 '25 '26 '2.7 '28

S
6
There

It is not easy to explain the recent recessions in business.
has been no general overproduction nor any credit stringency.

New financing

which reflects new enterprise has gone on in ever increasing amounts.

It is

likely that it is the effect of the accumulative action of a number of causes
which include the Ford cessation of new car production) the soft coal strike,
the floods, the collapse of the Florida boom, the let-down in new building

and

plant construction, conservation of railroads in ordering new equipment.
If those are the causes of recession they are mostly temporary and the
present almost unanimous opinion that business is likely to improve as the year
advances appears to have some justification.
As to the effect of changes in money conditions upon business recovery
there are two phases of the problem, the real supply of funds, and the psychological
reaction.

Under present conditions banks are finding difficulty in employing

their funds safely and

profitably.

This would still be true even if credit were

increasing less rapidly and money wore somewhat firmer;
obtain all the credit necessary at reasonable rates.

business could still

As to the psychological

effect of any action the Reserve System may take in the direction of firmer money
there is perhaps some question since business is now probably very sensitive to
changes in the credit picture.

The question for Federal Reserve policy is how

the present credit expansion can best be controlled if possible without adversely
affecting business.

FORE IGN EXCHANGES

A111)

GOLD EC)VMENT

Then Federal Reserve discount rates wore reduced last August and
September, money conditions abroad were an important consideration.
other European exchanges

Sterling and

were weak and stringent money conditions abroad, with

increasing discount rates and consequent pressure on world commodity markets which
might logically be followed by unemployment and declining purchasing power for our
own goods, appeared inevitable unless money were easier in this country.




7
Now the situation is quite changed.

Much that was hoped to be

accomplished by our rate action has been accomplished.

Most of the European

exchanges are above par and European countries have both taken gold from us
and increased their holdings of dollars.

Since the first of the year the exp..

changes have declined as bills drawn in dollars have come due and as short covering has become less of an influence.

Firmer money here would put more pressure

on the exchanges and might possibly lead to some rate advances abroad, but
European money markets are now more firmly entrenched and much more able to take
care of themselves.
The gold outflow appears to be slackening as foreign exchanges have
weakened and firmer money here would perhaps operate as a further check except
for central bank transactions or for other unusual transactions which may be
made regardless of the exchange position.

The recent gold exports, however,

have not only improved the monetary position of a number of countries but have
also had good psychological effect.

As a result, consideration of Federal

Reserve policy at this time can properly be much more independent of the
European situation than was the case last summer.




DOLLARS

DOLLARS

DOLLARS

2400

4.91

.4060
GOLD EXPORT P0./NT

4.89

4.87

PAR.

GOLD EXPORT 7
00mr

.23

.4040

.238

:4020

PAR..

_GOLD MPoRr PO/N
GoLD

GOLD //fPoRr P0/NT

4M5

//iPoRT

Porn)-

.237
ENGL

4.83

AND.

4000
GERMANY

.236C
A

.3980
A

.1950

5

0

.2725

SWITZER LAND

NOLL AND

5WEDEN

GOVD EXPO T Pomr

GOL

1

.1940

0

.1400
EXPORT Pomr

.1395
.270
0-0ZD EXPORT Pomr
PAR

.1390

• PAR.
.1930

PAR.

.2675

GOttp MPORT F'Opvt
_

.1385

_

Gobo /11PO1'r PO/Nr
GOLD / PORr

POINT

.2650

.1920
5




0

.13 80
A

N

0

I)

N

•

A

1.004

.98

GOLD EXPORT P0/NT

1.002,

,(;.LD EXPoer Pomr

.97
PAR.

1.000

6" 11,)_MPORr P0/NT

ARGE NTINE

pA R

A

5

.998

.996
0

CANADA
A

_

_

roret:OE;xchange
Rates al .Nesx; "Yokyk..

.96

.95

BELG IUM

0

9
PRESENT POSITION OF THE MONEY MARKET
Between September 1 and January 10 net gold exports and earmarkings
have taken approximately 230 million dollars out of the market.

Of this only

45 million has been offset by purchases of securities thus leaving a net loss
to the money market of about 185 million.

During this week we have sold ap-

proximately 30 million of Government securities and anticipate selling an additional 15 millions

within the next few days.

In addition, the required

reserves of member banks have increased about 100 million dollars.
early autumn, taking all these changes

Thus since

into consideration, the requirements for

reserve money for which banks or the market feel responsibility have increased
330 million dollars.

The full weight of this borrowing has only just begun to

fall on the market because of the extended Treasury overdraft from November 15
to December 20 and the distortion of the picture by year-end transactions.
At the last report all member banks owed the Reserve Banks about 500
million dollars and banks in New York City 180 million, and in addition bill
and security dealers have secured funds under sales contracts totaling 76 million.
The experience of the past shows that this amount of burden on the banks and
market will ordinarily keep the call money rate from 1/2 to 1 1/2 per cent above
the discount rate with other rates in correspondence.

Thus the conditions are

now present for considerably firmer money conditions than in the autumn.

The

adjustment of the market to these conditions has been a little slow because of
general expectancy of easy money after the turn of the year,

but the adjustment

now appears to be taking place.
The accompanying charts show recent money market tendencies compared
with a year ago and the relationship which has existed between member bank
borrowing and interest rates.




MILLIONS

RATE
7

MILLIONS /DOLLARS

e5

500

UJ

/927-28

1927-28
1400

400
10

•

TOTAL an-L5
SECURITIES

TOTAL E3/L1.
& SECURITIES

100

--- 300

i926-27

..900

200-

D/.5COUNT5

/927-28

/926-27
1926-21

100

's
/927- 28
ALL
t .BANK45
200 F.Ft

DISCOUNTS

2

CLOSING
CALL LOAN RATES
8

15

22

29

DECEMBER




F.R .B.
NEW YORK.

0
5

12,

19

26

JANUARY

1

8

15

22

DECEMBER

29

5

12.

19

2G

1

JANUARY

MONEY RATES Cf1/5E of R55E-VFW- BANK CAYD/T
Yet:trends of/92-27 &/927-28.

8

15

22

DECEMBER

29

5

)2

19

JANUARY

26

miniams

COMM. PAPER

OF DOLLARS

700

600

500

•••••••••••

•••••••••••••••••

DISCOUNTS

400

300
....•
200 COMME41CIAL
PAP R
100

0




1923

1924

1925

1926

Discounts for Mombors in Principal Citios Comparod
with Commorcial Papor Rates

1927

5

111
12

SUMMIIRY




The foregoing may be ommarized as follows:

1.

In recent months the volume of credit has been increasing more rapidly than appears to have been required for the needs of business.

2.

The increase seems to have flowed largely into the
chumels of investment and speculation, thout;h business
has probably benefited indirectly to some extent.

3.

Business has been receding due probably to causes which
are temporary, Fundamentals are generally sound.

4,

Even with somewhat firmer money conditions, business
is likely to get all the funds required, but business
psychology may be sensitive to abrupt changes in money
conditions.

5.

European money markets are now in a position largely to
take care of themselves and consideration of Federal
Reserve policy may well be more independent of them than
was the case last summer.

6.

Conditions now seem to be present for substantially firmer
money conditions than last autumn, though the market has
been slow in adjusting to these conditions.

7

•

s..44.
A
7 7

AEPORT OF THE SECRETARY TO THE OPEN MARKET 'INVESTMENT COMMITTEE
MEETING HELD IN WASHINGTON JANUARY 12% 1928

The holdings of Government securitios in the Special Investment Account
st the time of the last meeting of the Committee on November 2, 1927 amounted to
approximately

375,000,000.

Up to the first week in the new year this account VIRS

increased to ::,:;420, 000,000 by purchases made during the month of November of approximately . 15,000,000 of short-term Government securities, which purchases were msde
under the authorization given at the ls.st meet ing of the Committee, to o ffset in
part earmarking and shipments of gold.

Sales now being made from the Account

totaling about ',:)458 0001 000 will decrease the holdings to about 3375,000,000 or
approximately the same level as existed on November 2.
There have been some other changes of issues in the account which have
not affected the total holdings (with the exception of transactions in connection
with the December 15 financing period which only temporarily changed the total
holdings), the principal transact ions be ing
November 1927

Exchange in the New York and Chicago markets of
U.S. 3 1/270 Treasury Notes due 1930-32 and
25,000,000 " " Fourth 4Liberty Loan bonds for
,`?79,098,800 a like amount of short-term Governments*

December 1927

7ecernber 1927

VOLUME 176
PAGE 29




Ss.le of

Sale of

„')'9 2, 575,000

4 1/25 Treasury notes maturing December 15
to the fiscal agent of the British Government to be used by them in making payment
to the United States Government account
Brit ish Government Debt. About •;?58,000,000
Sf these certificates •gere acquired from
foreign correspondents on December 15 for
resale to the Agent o f the Brit ish Government and we purchased from the latter, in
exchange, a like amount of 3 1/2;', Treasury
Notes due March 15, 1932.

037, 560,000

short-term Governments to foreign correspondents to partly replace their holdings
of 4 1/2'1, Notes which matured December 15,
1927 against wh ich
o f fsett ing purchases of other issues of short-term
Governments were made.

2
Dec emb er 1927

Lec emb er 1927

J ?I-war y 1928

Exchange in
the market of
ab out

$60,000,000

P urc has e on
December 30 of $25,000,000

Sale on
January 4

of $22,0001000

of -the 3 1/21, Treasury notes due ?larch
15, 1932 acquired from the fiscal agent
of the British Government for a like
amount of the shorter-term Governments.

3 1/2% Treasury notes due March 15, 1932
from the fiscal agent of the British
Government. These notes were resold to
the market at the same price.

3 1/45 certificates of indebtedness due
March 15, 1928 to the fiscal agent of
the British Government. This sale ,,as
replaced by purchases of other issues of
short-term Governments in the market arid
from temporary holdings of the New York
reserve bank.

On November 25 the Federal Reserve Bank of Minneapolis, due to its
reserve position, sold 35,000,000 of Government securities from its participation
in the System Account.
These securities ivere.apportioned to the other participating banks and a like amount of bills was sold Minneapolis by -the Nevi York bank from
its p ortf olio.
On December 2 the Federal Reserve Bank of Dallas, due also to its reserve
position, sold 5,000,000 of Government, securities from their participation in the
System Account, These securities were apportioned to -the other participating banks,
a.nd the Federal Reserve Bank of New York sold to Dallas from its portf olio
000,000 bankers acceptances.
On January 5, 1928 the Federal Reserve 13ank of Atlanta, due to an
anticipated loss in their gold settlement, fund, requested that they be temporarily
relieved of t2,000,000 Government securities from their participation in -the System
Account,.
These securities were apportioned to the other participating banks.
The Reserve Bank of Atlanta repurchased these securities on Saturday, January 7,
In accordance with Mr. Case's letter to the governor of each Federal
reserve bank under date of January 4, 1928, the System's purchases of bills since
the beginnin8 of the year have been distributed in -the same manner as was followed
in 1926 and 1927, i.
during the early part of the year in -the proportion that
each bank's expenses and dividends bear to the total of the same items for all of
the banks f or -the previous year.




Attached are statements showing:
Exhibit A - Participati en of Federal reserve banks in System
Sp ecial Inv es tment Ac count Gov ernm en t securi ti es
and classification of issues held in the account
by maturities, as of close of business January 9,
1928.




3

Exhibit 13 — Statement showini; earnin,;
- asset holdirvs of all
Federal Reserve banks December 26, 19271 as
compared with previous week and December 29, 1926;
also weekly average of earning assets from
December 291 1926, to December 28, 1927, as compared
with corresponding period 1926.

•

•

EXHIBIT "A"

STATEIENT SHO•XING PARTICIPATION BY FEDERAL USERVE BANKS IN SYSTEM
SPECIAL INVESTIIENT ACCOUNT AND CLASSIFICATION OF ISSUES HELD
JANUARY 9, 1928 IN THE ACCOUNT BY MATURITIES

Bo ston
York

32,389,000
111,387,500

March 15, 1928 - 3 1/45 Cert. of Ind.
March 15, 1928 - 3

I.

Phil adelphia

30,216,500

June

Cleveland

34,972,500

Sept. 15, 1928 - 4 1/4'7. Third L/L bonds

Richmond

11, 20 2,000

Dec.

At

9,850,000

Chicago

64, 65 6,500

St. Louis

21,359,000

Minneapolis

1 6,20 2,000

Kansas City

28,46,500

Dallas

22,762,000

San Francisco

36,070,500

Totals




'y419,530,000

15, 1928 - 3 1/8j. "

15, 1928 - 3 1/45 Cert. of Ind.

March 15, 1932 - 3 1/25 Treas. Notes

5,337,500
90,099,000
64,512,500
188,181,000
16,100,000
55, 300,000

c-?419,5303000




SHONINU SAMINi) A3d 1-101.DIN3LI OF ALL rt;1)44:AL
.3ANK3 r.u.:Ze213 •A 25, 1927 (CEPA:L.:7)
rit PALVIOU51f4"..f:K AND nZ,C.L.2.f.D4:11 29, 1926; ALSO ;r;aay
A‘Latik,ii. OFtAit,\IING
thOti
- a:A 29 t 1926 f0 DI;;Z!-*B.ER 28-, 1927 AZ, C:01,1PAri.:.!) .11111'• 30PONDINO 'on 1926 AND Is'w ite, TsAit 1926
75i9c
•

5
r
A4,401
r

, Boston
sills Discounted
•
•

- Des. 21
'
1
28

Net Change

68s.

Sills Purehased
•
•

- Dee. 21
" 28

Net Chang*

45,022
48,738
3,716.

Government Seeurities- Dee. 21
•
•
" 28
nt Change

36,177
35,116
1,061-

Total &truing Assets
0

$41,031
40,;63

se

Dec. 2;"
1.

Net Chan*

122,230
124,817
2,581.

AO*

#192,79
'&121,4E7
70,693*

76,896
95.931
19,035*

154,028
168,619

438,750

14.90
C•

_297-

41,661
42,279

19,7
19,1

7,975
8,072

618.

4. ,b64
45,664

2.•

61,511
61,511

J083
13,593

14,651+

423,718
528,097
104,379.

210-

136,554

156,8

143,872

151,8

52,084
48,769

7,318+

5,0

•

88,od5
91,705
91,705,),;,

111,995
115,174
115,174

55,679
59.559
59,659

86,2.
87,958
1,745+

220,860
213,826

3,315-

971

,90G
,900

38,342
3P,342

0-

-Ow

5
J5

62,916
62,334
582..

21,750
22,685
935*

31,644
31,693
47*

58,272
56,959

23,792"

9,639
10,485
846*

46,075

46,075
-0-

94,464
71.518

1,313..

Totals

i 578,156
601.209
31,053.

365,772
385.527
19 DM*

587.952
603,126
15,174.

1160
1,...,842
65482.

Comparison of bieekly Average

sammur Amt.
Dos• 29, 192‘ to Dec. 28, 1927
$ame period 1926
Satire year 1926
Net Change iron este period'
,1926
Net Change frees entire year 1926

Cipparisen et darning. Assets
December 20, 1927
29, 1926
Net Change




79,546
82,511

/$12,822
,8,628

2,965•.

4,190

3,62.

3$279.

2,965-

4,194.

3,620w ,

3,279-

124,817
126,953
2,136-

528,097
3.39•793
188,304.

143,872
110,343
33,529.

151,877
167,371
15,5n1-

49,115
76,645
76,645
.
"
17.5.10

hi4980.•

27,530-

89,4An
45,660

67,736

43,780+

18,967-

41,769

155,312
164,144
164,144
8,3328,332-

213,826
234,868
21,042-,

59.695

35.537

63.f41
63,841

37,874
37,874

4,,46..
4,14 -

62,707
60,890
1,'317+

2,3372,337-

44,626
35,278

9,348+

titIMARTFOKSY3f}:
Bills Discounted for weak
Bills Pun:named for week
19,755.
Government .ieourities for week
15,174+
..tal i.orninc Assets for week
65.982.
L;ompu.ison Of .isekly Avurkige of 4:erninr; Assots 7.tee. 291 1926
to Dec. 29. 1927 with same period 1926 and entire year 1926 81,954comparison of 4arning Aae.te Deoomber 28, 1127 with
December 29, 1926
189,313+

55.562
61 .18
6

46,416
52,717
52,777

4-

6,361-

)66-

6,361-

62,334

5e.in
4,153+

5c.959
43,536
13,423+

'00.415
6,04/

15,63215,632-

71,518
118,913

47,395-

1,120,579
1,202,533
1,202,533

81,954-

1,518,842
1.409.529

1e9,313.

6-‘

Form No. 131.

Office Correspontence
Mr. Hamlin

To

nom

(

FEDERAL RESERVE
BOARD

Date January 24, 1928.

Subject:

Mr. McClelland.
2--S4416

There are given below the changes in the discount rate of the
Federal Reserve Bank of New York made during the years 1925, 1926
and 1927:
February 27, 1925 -

Increased from 3% to 3 1/2%; the rate of
3% having been in effect since August 8,
1924.

January 8, 1926 -

Increased to 4%.

April 23, 1926 -

Reduced to 3 1/2%.

August 13, 1926 -

Increased to 4%.

August 5, 1927 -

Reduced to 3 112g.

ILL

VOLUME 176
PAGE 66



•
Now York
Dealers

Total

$ 16,308
25,136
25,167
16,000

$ 2,925
.1,058
2,144
2,324

1,251
539

14,893

$ 7,684
7,047
10,624
1,107

20
27

1,726
550
816
1,564

16,870
9,382
25,293
8,457

1,694
3,446
5,099
705

18,564
14,728
40,392
9.162

3,135
1,129
553
969

717
1,303
476
254

6
13
20
27

1,579
6,389
1,506
4,701

13,256
2,018
9,752
5,648

2,244
5,567
7,508
12,097

15,530
7,585
17,260
17,745

4,311
2,124
1,227
516

3

929
1,665
4,281
2,496

9,073
6,732
3,525
8,321

6,584
2,531
2,504
416

15,657
9,263
6,029
9,737

1,410

1,639
1,594
2,554

3,050
1,442
3,230
1,742
1,442

13,843
7,408
4,385
6,382
3,834

8,654
191
9,634
11,898
6,390

22,497
7,599
14,019
18,280
10,224

2,387
1,699
1,399
1,623
1,946

-0-

8
15
22
29
5
12
19
26

1,594
1,040
114
339

4,856
4,038
2,810
4,374

2,902
1,355
2,883
945

7,758
5,363
5,693
5,519

2,113
2,177
971
'77

-0-0-

792
1,050

J

1,686

15

6,606
1,270
-03,654

6,621
1,270
847
10,229
4,831

1,303
45
124
771
588

-0-0-0-0-0-

Weeks
iAliA4

-1212Jan.

9

16

23
40
1ab.

6
13

!larch

April

10

17
24
1

May

June

July

10

Aug.

1.21188

Banks

$ 15,631
8,792
4,605
1,148

$ 8,624
18,089

-0-

14,343

-0-

Philu.
-0-

-0-

418
1,510

863
1,424
498
-0-

2,042
-0-

250
9
-C-

502

17
24
31

604
598
864

847
1,575
4,831

7
14
21
28

720
4,857
2,281
2,686

3,031
2,038
3,929
6,585

6,737
2,319
5,926

J,031
8,745
6,748
12,311

1,090
1,356
1,558
3,644

-0-0-

4

1,411
1,344

8,265
21,431
13,974
5,151

11,184
38,210
27,064
21,707

1,836
2,023
2,202
2,304

1,190

67,099
51,291
32,929
32,415
6,053

2,938
1,981
1,943
952
284

200
1,785

12,862
975
2,096

-0-

-0-

-0-

161
707
JJ8
574

-0-0-0-0-

2,820

-0-0-0-

Sipt.

-0-0-

18
25

1,131

357

2,719
16,779
13,090
16,556

2

1,014
1,125
962
1,744
5

14,113
9,828
13,966
2,323
6,053

52,986
41,463
18,963
30,092

3

12,862
775
311

-0-

11

0ot.

9
16
23
30
Nov.

FR01! JANUARY 3 TO

6
13
20

18

27

383

12

-0-

104
598
-0-

200
75
479
-0-

460
351
-0-

4

-0-

11
24
31

1,418
84
1,187
1.‘49

1,351
11,650
17,640
8,974
7.995

9,944
19,750
297
43.298

4,171
21,594
47,480
9,271
41.293

141
1,285
1,220
565
2,629

1.0:AL5

8100,474

11406,402

4416,010

022,412

$80,617

2,359
4,359
1,627
563

25,7E6
20,539
9,398
10,740

7,338
30,900
14,187
4,834

,,104
31,449
2J,585
15,574

1,J85

1,838
1,608
1,160

...0-0-

172

37,970
6,073
37,852
30,381

14,294
8,973
12,441
15,677

52,264
15,046
30,284
46,058

1,813
544
878
2,585

-0.0-0-

J,85e,

J2,322

1,150

-0-

2,387
4.567

11,101

18.217

279
698

..0-

Il

28,464
8,714
13.65Q

$12,154

1229,547

$119,446

$348,993

$13,438

_0-

Dc.

18

-0-O.

12.427.
Jan.

8
15
22
29
5

7ob.

Mar.

11

-0-

19
26

613
2,175

5
12
19

900
301

/0:AL1,



#17,353

-0-0-

-0-

-0-

•

Fotra No. 131.

Office Correspontence
To

Mr. Hamlin

From

Mr. Goldenweiser

FRDERAL RESERVE
BOARD

•
Date

January 23

Subject:

1928

7/
2-84146
1;1' ,)

I attach hereto copy of a letter I sent to Mr. Curtiss in
accordance with your request of the nineteenth.

VOLUME 176
PAGE 71



January 21, 1928

Dear -r. Curtiss:
At your request trahsmitted through IT. Hamlin, I am sendinz you
the following brief state:aent of the carrent credit situation.
Nineteen twenty-seven was a year of ra1A1 expansion of bank credit,
the growth of loans and investments of re2orting member banks in leading
cities for the year being abut 9 per cent, comparod with 2 per cent in
1926, and 5 per (sent in 1925. In 1924, however, the credit of these tanks
Increased 13 per cent, that is, at a more rapid rate than in the year Just
closed.
No incroa,se in the deland for ordit by trale ala indurtry occarred
during the year. Thus loans, other than loans on securities, decrea-ed
23,000,000 between tile averae;e for December, 1926 and Decelber, 1927. On
the Oasis of evidence available for all member banks for the end of June, it
appears, furthermore, that there was a growth in real estate loans, which
are included in "all other" loans, and that co ,mercial loans proper declined
conliderably durinj; the year. :1 factor accountin;7 for the decline in commercial loans was the somewhat lower volume of industrial aid trade activity
and the slightly lower level of commodity prices. An add!tional influence,
and one that is emphasized by Professor Sprague, was the low level of longtime interest rates, compared with the rates e•Arged. to cu,Itonerr by commercial banks. This differential induced many large users of crAlt to issue
secarities rather than borrow from their :ianks. The volume of capital flotations, both domestic and foreign, IMF indeed exceptionally large in 1927.
This large volume of securities Jostled was In tarn
influence in the
;rowth of investment holdings of commercial banks and also in the increase
of collateral lo:Ins at these banxs, particularly of loans to orokers and
dealers in securities. this class of loans, as shown for acout 53 reportin member banks in New York City, i-creased from 42,698,000,000 in December,
1926 to $3,621,000,000 in December, 1927, a growth for the year of
per
cent. Accordint
: to the figures published by the New York Stocic 'xchange,
which are the most comprehensive, brokers' loans reached at the end of December the unprecedented total of $4,433,000,000, showing a growth of ::5 per
cent for the year.




Ar. P. R. Curtiss,

Analysis of the increase in brokers' loans shows that a conr!deect
proportion ef it represents loans by New York banks on account of out-oftown banking corres)ondents and on aceow,t of other customers. A part of
the growth in the loans by New York ba_ke for their own acooant also
represeAts the use of out-of-town fu dm, since balances held by there banks
for banks in the interior increased by204,000,000 during the year. 'Following is a statistical summary of the situation:
BROKLRS' LOANS aND BANKtMS' BADANCBS AT RIMMING
BANKS IN Yr YOU CITY"
'(Monthly average of weekly figures: millions of dollars)
Deceiberi- December:
: 1926
1927 :
a
Increase
3rokers' loans, total
For own accou,t
?or accou t of out-of-town banks
For account of others
Anent ts due to ba_iks

2,698

3,621

923

887
1, 045
766

1,282
1,354
985

395
309
219

1,078

1,282

204

The figures indicate that the growth of brokers' loans in New 'fork City
was largely out of fuads supplied by the rent of the country; an ample supply
of bank oredit and absence of commercial de-nand were the principal factors
bringilng these fund:: to New 'fork.
The volume of reserve bank eredit, which darin,7 a large part of 1927 was
smaller than in 1926, increased rapidly after August 1, so that during the
last two months it was much larger than a year before, and at the end of the
year was larger than at any time in the past six years. This chance in the
volume of reserve bank credit was due chiefly to the loes of gold, either
through export or though earmarking, which was reflected in a declineof our
stock of monetary gold by U08,000,000 during the last four months.
The reserve system's credit policy throughout a large part of the year
was in the direotion of easy money. Early in the year large eold imports
came to this country and not being offset by open-market purchases, were used
to reduce member bank indebtedness and also to increase their reserve balancee
with the reserve banks. In the spring gold withdrawals through earmarking for
foreign account were more than offset by the purchase of securities, and member bank reserves continued to grow. In mid-summer the system adopted a




r.

H. Curtin),

•-•

policy of further purchases of sec-Arities and of reduction in dicou.t
rates. This policy was adopted at a time whea domestic business was relatively inactive, and when easy money was expected to facilitate the mar,ceting of crops, which was then about to begin. It was also believed that a
lower level of rates here than abroad would help 3uropean countries to meet
the autumn demand for dollar exchange, necelsary to pay for American prodlots,
without loss of gold or serious tightening of credit conditions, in the result of this policy, sterling and other '2_aropean exeharv:es advanced in ilew
Tor, and as early as Septe:aber goa began to flpw out of this country, chiefly to "Jouth America. At first the ?adored reserve hank.s offset gold exports
by security purchases, but in view of the coatinnel ease of the money market
and the rapid growth of beak credit offsetting purchases were discontinued,
and the withdrawals of gold were permitted to have their effect on the money
market. This resulted in a rapid grorth of member bank borrlwin, which was
Also increased by seasonal currency reqairoments. A the eA.d of the year
money rates advaAced and the market became traghter, though still le?, firm
than the year before.
After the tur of the year the usual c:easonal flow of currency
culation and of investment fads to Yew York eased the condition of
market. Gold movements in Ja.auary were in coriderable volame, but
from Canada were about as lar-Te as ex?orts to urope and "outh Amer
order to absorb the return flow of currency and not have it lead to
growth of member bank reserves, the Federal reserve )anics have sold
out of the eystem's investment account.

from cirthe money
Imports
ca. In
a further
securities

Information on business activity in January Is as yet incomplete, but increased activity is reported in the steel and automobile industries. Commodity
prices, after rising from June to jotober, larely reflecting rice adva.ces
for agricaltural products, subsequently declined somewhat. In Zurope central
banks are now in a stronger position than last autumn, both because of the
fact that this is the season of heavy American purchases abroad, aAd conseqnently of strength in the exchanges, and also :Amuse of some additiono to
the gold reserves in recent months. -t some of these banks discount rates
have been reduced.
I hope that this brief survey, whicn I an afraid, contains nothing with
which you are not already familiar, aay be of service to yoa.

Very truly yours,

E. A. Goldenweiser,
,Arector of Researen and tatistics.
Ar. F. H. Curtiss
Federal Reserve Age-A
3o3toa, ,Assachusetts






:74

•4

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•

January 21, 1928

t*'.PI
'

A
•
,
-

•
I 4,

•;

••

•
11
:
1

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f•e'

Dear

Curtiss:

•
Nineteen twe,ity-sevea via a ye:tr of rapid expansio
n of bent credit,' ,
the growth of 1oc.n a. inv9t c
r re-mrting moml-ler banks in liadinG
cities for the year being at. at 9 per cent, comp
ared with 2 per cent in
1920, and 5 per ceA in 1921). In 19f4, however,
the credit of these banks
increased 13 per cent, that is, at a more rapid
rate than in the year just
closed.
No incrti,se in the deland for cr - ftit by trad
e and industry ocearred • :
durinj the year. Thus loan, other than loan
s on soeorities, 4sereavit 137
$23,000,0L)0 •,etwee.1 tie averace for i)ecember,
1926 an& December, 1927. On
the basis of evidence ava'lable for all
member banks for the end of lune, it
appears, furthermore, that there we.r a growth
in real sstate -loans, which
are included in "all other" loans, and that
seAmercial-leans proper dmatnela
con-iideratly durin- the year. . factor accountin,
s; for the decline in commercial loans was the somewhat lower volume
of industrial and trade activity
and the slightly lower level of z.om-volity
prices. An additional influence,
and one that is emphasized by Profe-sor
Spragus, was the low level of long.:time interest rats, com..arel wit,: the rate
s charged to curtwsers by eessair7
cial ba_iks. This differential iniaced many
large users ef.eredit to Issue
secaritLes rater than borrow fry% their bank
s. The volume of eapital f/o. .
tations, both domertic and fore:rc., wa?
indeed exceptionally -large in 1927, _

FIOD MI, lelOda

At your requert traasmitted through Mr. Hamlin, I
am mains you
the following brief state:aent of the carrent eredit
situation.

Er)

This large volume of securit:es isued was in
turn an. inflrisncs4n$Mø
growth of investment holdin-s of coqraer-ci
al bsinke and also -in the intro/10e
of collateral Louis at thee ban:p, particul
arly of loans to brokers an&
dealers in securities. T:tir class of loan
s,
at shown for about 50'reportinj,
member banks in New 'fork City, 1..cre4sed
from $2,696,000,000 in December, '
1926 to $3,621,000,000 in Decey.ter, 1927,
a growth for the year of 34 per
cent. Accordin,7 to the figures putli.shed
by the New York Stock 'Exchange,
imich sr_ the most comprehensive, trokers'
ber the unprecedented total of *-1,433,00 loan reached at the end of Docea.
0,000, showing a grewth of 35 per
cent for the year.

cr)

‘
. kooriii No. 111.

Office Corresportence
To

FEDERAL RESERVE
BOARD

S--e-4- 614.1111
?

•

Date January 27, 1928.
Subject:Dome stic Acceptnnces

MrHmlin.
Mr_ Smead

2--9495
GPO

In accordance with your request for some figures relating to domestic
acceptances, I am handing you herewith a statement showing the amount of bankers'
acceptances drawn to finance the domestic shipments of goods or the storage of
goods within the United States, which were bought outright (not including acceptances taken under resale contract) by the Federal reserve banks during the past
three years, classified to show the commodity financed. In this statement you
will note that the principal commodities involved are cotton, grain, tobacco,
wool, and other agricultural products.
The total amount of domestic bankers' acceptances held by the Federal
reserve banks as compared with the total volume of such acceptances outstanding
(approximately 80 per cent of which were drawn to finance the domestic storage of
goods) on December 31, 1924, and as of November 30 of each of the past .three years,
was as follows:
BANKERS' ACCEPTANCES BASED ON DOMESTIC TRANSACTIONS
Date

Held by
F. R. Banks*

Nov. 30, 1927
1926
1925
Dec. 31, 1924

$81,880,000
65,641,000
55,298,000
94,556,000

Total
Outstanding
$208,039,000
125,121,000
118,840,000
200,305,000

*Including resale contracts.
As you know, the Federal reserve banks buy very few trade acceptances
in the open market and that few they do buy are most always drawn to finance imports
or exports of goods. During 1927 the small volume of domestic trade acceptances
purchased, about $200,000, are understood to have been based on the purchase of silk
by manufacturers from import houses.
Most of the domestic trade acceptances acquired by the Federal reserve
banks are endorsed by member banks and discounted with the Reserve banks, the reason
being presumably that these trade acceptances do not have a ready sale in the open
market and consequently the rate which they command is no better than the rate on
other discounted bills. During 1927 the Federal reserve banks discounted $15,897,000
of trade acceptances, all of wilich were drawn to finance domestic transactions. The
amount of trade acceptances discounted by the Federal reserve banks was relatively
large back in 1913-1921, as will be seen from the following table showing figures
of trade acceptances discounted since 1916:
1916
1917
1918
1919

$5,212,000
37,771,000
187,373,000
133,420,000

1920
1921
1922
1923

$192,157,000
123,944,000
44,272,000
51,393,000

1924
1925
1926
1927

$38,325,000
23,688,000
20,316,000
15,697,000

In the early days, as you know, quite an effort was made to popularize
the trade acceptance, and as a matter of fact, in some cases the Federal Reserve
Board granted preferential rates on trade acceptances. These preferential rates,
however, were all discontinued before the end of 1921.
VOLUME 176
PAGE 101



BANKERS' ACCEPTANCES BASED ON DOMESTIC TRANSACTIONS PURCHASED
BY THE FEDERAL RESERVE BANKS 1925 TO 1927.
By Commodities Financed.

Cotton
Grain
Tobacco
ioo1
Rubber
Sugar
Crude & Refined
mineral oil
Fruit
Hides & Skins
Lard & Yeats
Lumber
Silk
Vegetables
Coal
All other

Total




1525

1926

1927*

$136,945,000
56,281,000
33,651,000
17,320,000
1,321,000
2,740,000

$111,240,000
33,559,000
22,802,000
19,766,000
2,597,000
10,726,000

$162,385,000
31,769,000
20,090,000
11,560,000
26,117,000
21,463,000

7,423,000
4,226,000
7,703,000
7,099,000
2,437,000
2,275,000
3,529,000
2,632,000

9,754,000
7,905,000
7,017,000
6,479,000
5,166,000
3,797,000
3,554,000
2,673,000

5,730,000
11,366,000
9,120,000
4,206,000
2,462,000
2,425,000
2,133,000
4,570,000

47,694,000

59,670,000

50,562,000

335,476,000

306,907,000

386,068,000

*Preliminary figures.

SAIVA
tatit444040.441.A.

•
,

30

THE RESERT7 BA1T:S, ;CLD, A:1D :J.CNTf RAT-7,S
Firmer m(!ney rates
Bankin7 and credit developments since the turn of the.year have been sc
much under the influence of seasonal movements that it is difficult to determine the underlyin:, less temporary trends.

The return flow of currency from

circulatiIn, velich always sets in after December 24, was in approximately the
same volume this year as usual, the decline in the currency demand between
2C,C(:0,000.
that date and January 25 being '31,

Anrthar seasonal movement has

been the flow of funds to New York arising Largely out cf first-of-year d
delid and interest disbursements to secarity holders all over the country seeking reinyest.:nent in the money market.

The volume of member bank credit, which

,:;200,000,000 in t'ae following
reached its peak on January 4, declined by about .
tw: weeks, the decline beinf2: entirely in loans on securities, and bein3 accompanied by a corres2onding decrease in demand deoosits, and consequently in
member bank reserve requirements.

Demand for reserve han..: credit diminished

rapidly, and total bills and securities of the Tederal reserve bank's declined
fr,m S1,600,000,000 on December 28 to -1,175,000,000 on January 25.

Notwith-

standing these seasonal influences, cGnditions in the money market continued
tc be about the same as in December, with a tendency at the end of tha ncrith
towards firmer rates.

The rate on call money, with fluctuations, was at abrut

the sa.r.e average level as in December, and the rates on time money were somewhat firmer.

There was a slight advance in the rate for bankers' acceptances

and t'ae rate cn commercial paper, after declining slightly at the turn of the
year, rose once more to the 4 Per ,;ent level, which it had maintained since
early autumn.

Among the influences working against an easinc- in money rates

were the sales of United States securit'es by the Federal reserve banks, which
VOLUME 176
PAGE 117



— 2 —
from Ja.auary 4 to January 25 amounted to %37,000,000.

11-Lese sales of securi-

ties absorbed someof the retura flow of currency, with the conseuence that
!Tienber bank borrowings at the reserve baxcs declined less than wouli have otherwise been the case.

There were also longer-term infiuences in the direction of

firmer money rates.

Reserve requirements of member banks increased raoidly in

the last half of 1927, reflecting a growth in the banks' deeosit liabilities,
and particularly in their demand de)osits.

There was also a decrease of more

-old durinc- the last four
than t:200,000,000 in the coun,ry's stock of monetary ,
.
months of the year through ex)crts and through earmarkings for foreign account
In January gold ex )crts continued on a considerable scale, but were offset by
the usual

seasonal flow of gold from Canada, so that there was li*tle change

in the gold stock 'orthe month.

The previous loss of gold during the period

increasing
of the maximum seasonal currency demand, however, was a factor in
ed io be
the volume of member bank borrowings at the, reserve banks, and continu
an influence toward firner money conditions after the turn of the year.
policy
Gold and Federal reserve
_
In view of the fact that the reversal of gold movements in the last four
months was one of the principal financial developments or 1927, it is
the
opportune at this time to review briefly changes in the gold stock during
these
year, and the polic,, of the Federal reserve system with reference to
changes.

increases
Darin 7 the first four months of the year there were large

year
in the gold stocc arising from gold imports, Whila in Tanuary of last
were larger than in any month for _,,bout three years.

This gold, tcv-rather with

banks to
the usual seasonal return flow of currency was used by member
:, and the volume of reserve
liquidate their indebtedness at the reserve ban.
two years .and rebank credit declined rapilly to the lowest level in about
mained near this level for several months.




There wore no considerable

-5 changes in tho syste.11's holdinP:s of Government secart'es beforu - I, And the
Told imports durin- this period were r)flect.:d in a ,
;rowth of :aembar bank reserve balances and exerted an eusin,-7 influence on the money market.
with

'1oTinning

however, the, stock of monet ry gold began to doclino slowly, and

doclined almost continuously for tha rest of the your, the decrease between
:jay 1, 1927 and Tunuary 1, 1928. beinz about

230,000,000.

in tha Told sto:.k in 1:LLy reflected th; withdrawal of

The sliFht decline

95,000,000 of Told to be

aarziarked for forei7n account, offset by the imilortation of about
of gold and the purchase by the reserve bun'',-s of
3oth

oar-12.rkin7 and the imports darinT

bankinF developments in -71.
- ncE,.

30,000,000

60,000,000 of Told abroad.

wan: lar .re1:7- the conseoaen3e of

e 3anii: of France in th: course of th) month

paid off a war debt to the BanIc o' Enz7I-And and thereby rogained control of
about ",',90,000,000 of gold whic
und had thus not been
gold.

had been pledged as pa.rtial secarity for the
2art of the world's avilable

o' monetary

2he Fold thus released was offored in the marl.cet and 4 70,000,n00 o' it

was exported to th. United States on private account, whilo 1 60,000,000
purchased by t)-1,3 Pcideral reserve b-rfts and Icapt in London.

Laier in th,) nonth

the Bank of France decided to convert a p.art of its randly Trowin7.
"or2ign
exchanFe holdin7s into gold und for this purpose purchased largo amunts of
gold in Ne7 fork to be e_rn-rked for its account.

In mane and Tuly the

eral reserve b_,..nIcs sold the gold held abrold, -Lt first holdinT the proc,:eds
abroad partly on b.dance and partly invested in bills, but 1%.ter disposinT
I f these foroic,.n holdings.
Chn.0:
. es in gold stock betwcen
-.-1-„11, -al reserve b_Lnk open A7Lr<et
117 infliencei 137I
saczrities




ovenents.

t'lese aonths were

1 and Sept_nber I were rel:_tivoly
durinT th..A period w -.9 not saateriConsiderable purch::,ses of Government
by the bancs Its

A

oLrt o'

4
of easing the money situ:ttion adopted by the reserve syst3m in mid-summer
which was refl)ctad _tlso in the reduction of the discount rtes at all the reservo banks from 4 to 7 1/2 per cent.
Reversal of gold Plow
The decline of money rtes to the low level which prakailed in this country
beginning with ,Lugust increased the differential between the rates in this
country and abroad and lad to a considerable out -Plow of Punds from the United
States.

As a consequence, sterling and other exchanges advu.aced rapidly in

the New fcrk market and it became prLfit-_ble for some
gold in the United States.

countries fo procure

This situation resulted in the purchase in New York

and exportation of large amounts of gold by South American countries, part 4 cularly Argentina and -3razil, which were undertakin, monetary reforms at that
time, floated substantial loans in this country, and were in a position to acquire gold in large volume as required by their programs.

The relatively low

money rates prevaili - in New York and. the stren7th of foreign exchuncres were
inflae:ces causing mach of this c7oLd to be bou.--ht in Now York rather thon in
other

inanci.1 centers, and this relieved Europe of - large part of the drain

of geld to South America.

Mile the exports of gold in the latter part of

the year were Princip:Llly to Argentina and

razil, Canada also obtained its

usual seasonal volume of gold in November and December, and there were
smaller exports to Poland, Netherlands, France, EnEl aid and 13elgium.

The

destination of gold experts during the period September to December is shorn
in the following table:




•
_

_

GOLD _DPORTS: S-3?T3:17,'R-D-.17,17,1_::;.r-i, 1927

Viount

Country

1;2,200,000
8,548,000
10,000,000

3elgium
Eng1:-,nd
Frnce
Germany
jetherlands

8,055,000
5,000,000
25,274,000
61,390,000
37,010,000

Canuda
Argentina,
3razil

14,731,000

All other

168,257,000

Total

In 1,1dditien to thc) exports of a-old, there were also addition_l zoli withdraw._,ls for o_Lrm-rkin4 in tha
Janairy 1 thore was
gold.

tu_In months, so thtt betwoen September 1 -L,nd

docroJ,se of 408,000,000 in the tot-i_ monet-Lry stock of

At first the affects of these decrp.::_ses on the monoy m:krket were g,ner-

-dly offset by security purch:Lses lo:r the reservo b,Lk_s, out there purchlsos
ware in mach snallar volume after thu be inning- of .ov.riber.

The lan-or

of the 7011 withdraw -is, therefore, exerted its full influonce on cradit conditions in this country, both by incresing- member b..,:fc indebtednass at the
rosurve b%nks, and b./ givinr rise to e, so:newhnt firmer situ,Ltion in the money
market.
The system's policy in permitting the ?.-old exnorts in the last months of
the year to h:Lve thoir full effect on domestic credit conditions war dao larr-ely to the fct, th-t while moncy continued to be :tv.A1-..b1,: to trade and industry
gt relAtively low r_ttes, there w_;.s -L continued .:,ddr_pid growth in ne volume of
member bl.rik credit, -nd p-rticul,rli in the bl..nks' inv,ertlentr and lo .- .ns on
securities.

?has, notwithstandinEr the drldn on nembor baric rosorves throup-h

gold exports, r=pserwe b.1:21ces of these banks with




reservo

incre--sed

in the Lutumn and eLrly Tinter as .1 consociae,ice or the grovth or the .11e.nber
b„ITcs' deeosit ii 1ji1ities.
Reserve bank funds in 1927
?or the ye:.r 1 927 Is a whole reserve banc credit outst7,nding. showed an
increase of .- .bout

Ls measured by the average volume of bills

and secarities hold by the reserve b-n.'cs in December, 1926 and. December, 1927.
As against thie incretse in reserve 1- 1, credit there was a decrease in the
country's monetl_rv gold stocic of ':,boat

70,000,000

measured by averarros of

figures for first and. end of nonth), so that rosrve funds released throaot
discounts and purchases by the reserve b..nl.cs exceed e
- d the loss or gold, which
absorbs reserve funds, by about fV60,000,000 daring the year.
were also released, however, through the redaction of '3,boat

Reserve funds
30,000,000 in

deposits held by the reserve ban'cs for the Trc-sury -ad other nonmembr depositors, and of )
i 90,000,000 in the volume of currency in circulation.

This

docre-sa in the currency demand, which reflected the somewhat less active condition or trtde and indistry, resulted in an tccumul Alan o' '..arrency at mellbor
banks, which deposited this c.tqh with the r-sprve b.n'cs and thus obt-lined an
equivalent .:-.1ou.nt of reserve ban'c funds.

he additions to those funds

the

disosal of the member bruft's were absorbed in the momb3r banks' reserve
balances which inereIsed by :i130,000,000 darin7 the year.

Thus the increase

in member 13 .- .n'K n,srva bA,ncos, which Tonstitated the basis of credit oxtension br member b-nlzs durin7 the year, wls obtained. in )..Jrt from an increase
in the bills and securities held by the reserve bLn'cc: and in lsrgr part from
other soarces, not .bly the decrLse in the country's dan.Lnd

or hanri-to-h-,nd

currency.
oney rates abroad
During th.) 1-:.st four months of the year, the loss of gold, together with
the incre:Ls-d demand for reserves and the seasonal R7rowth of currency rocuirements, resulted in



rise in money. rates.

In foreism mar'cots money rates con-

•

•

/17

-7 tinued firzi throusrhout the

utumn 421 erly. Tinter, liotdithst.ndincr th3 out-

or funds frm the UAited St-tes.

flow of _Told

r:Aes on bakers'
London the r.te re'Llined
lLst '11,7.

The folloTirr- ch:.rt

t%e princio,1 mone7 m_Irkets or the 7:orld.

In

after its tel)er,ry decline and risa daring

In GJrl.ny, the bill rs.JA:, rose Ilmocli c-ntnaously throughout thu

rear from 4 or ,lent in _TLnur7. to Lboat 7 per celt in Dc aJ er.
other countriec. 'Aso advAlicod.

Ratas in

In racmt IN303 there hr, bek:n som

e-sing of

money rates in SOM.: of the 3uropa;n countrie-, owirg. in part to thc, -passing of
- 1it and. foroifrn exchange raqiirements of the autu:In season.
th3 cr 2

"-old re-

serves at some of the Europoln banks Ilso showed incre- ser during ths period,
partly as a r,3sult o' imorts from thin country, „nd o.rtly bec.:,us(, they
,
son:

D's

th,- new .7o1d mined in South Africa.

As a consequoncc, tho

reserve position of some of the Europe-,n central banks is stronrer at pr- sent
than it w,s durinr, the autumn, and discount rates at somo of th_s3 ba,ks have
been reduom in recent wo,e'l-s.

The declines in money rttas in foreiTn canters,

tooather with the recent ris) cf ratus in this country., has brought the levels
of intar_st rates here .2-11 ,2-bro:td into somewhat closer alignment.

Advances in discount
The discm.Lit r.._te on all clr-sses of7 p...,per of ',Al

atirities ve-ls idv -Inced

from 7 1/2 to 4 pr cent at thc 7oderd R)sei.vo 3anc of Chicago, effective
January 25, _;nd at the 'od.orai Reserve




B/AI

of Richmond, effective Janu%r7 27.

•

4

JOILs

flJ"r;

ITT:7

.1a

Aillual Statement Federal Reserve Bilks. :emery 4. 1928:
(In Millions)
Total Reserves
Poponits
Fadwral Reserve Notes

P.53c
jati.0

Reserve Ratio
mourning that we export one billion dollars gold from the
present Reserve Bank supply; then
rederal Reserve 3ank Aatonents.
Total Reserves
Deposits
Federal Reserve Notes

:1,050
t2,536

_1.100

,ff.ammamm•moorm...

Reserve Ratio

.

Assad% we have gathered one billion dollars of gold certificates in the general circulation, substituting
Federal Reserve Notes; then Federal Reserve Iiiatements
Total Reserves
............ ........
Dec,oeits
;2,536
?ederal lieserve Mytar
_2.760
Leservo Ratio

4,296
44.

.....:3,830
5,296
73.

maim% the export of one billion cold, after taking it from the circulation;thenFederal Reserve Statements
Total Reserves
:2,389
Deposits
:2,536
Federal Reserve Notes
5,296
_4060
Reserve Ratio

54.5

Amusing. further that, after the export of gold, some oeourion should arise,
from
ARIPPrebAnsion, extraordinary industrial activity, same minor war,
or otherwise, hom we should need &considerable amount of additional currency
.
The ratio of currency in general circulation in 1921, at the lottam of the
depression, to total bank deposits of the ovantry was 13.83.
Applying
that ratio to present balk deposits (52,250) would call for 7,226 millions
or 2,483 millions additional, which, ay the way, is less than 5f of all
bank deposits.
Amusing the issue of that amount of additional Federal Reserve Notes; then Federal Reserve rtatement:
Total Reserves
:2,839
Deposits
:2,536
FedsralReserve Notes
5,243
7,779
Reserve Ratio
37.
Of emarse, if currently were withdrarn from the banks, deposits would
be reduced by so
wool' and the required reserve accordingly, but the reduction of
2,500 millions of deposits
from all the tanke of the country would not be likelyto reduce the
required reserve of name
ber banks more than 125 to 150 millions, if that; an
inconsequential sm. It is to be Ob.
served that the Josue of the adaitional amount of
currency specified, if required, would reduce ths reserves below the legal limit, and that
without the grant of one dollar additional credit by the amber banks.



•
MEMORANDUM FOR THE DIRECTORS OF THE FEDERAL RESERVE BANK OF RICHMOND
BY
GEORGE J. SEAY GOVERNOR

RESPONSIBILITY OF THE FEDERAL RESERVE SYSTEM
FOR THE
PRESENT CONDITION OF CREDIT INFLATION

That credit has been expanded to an extraordinary degree is a matter of fact
which cannot be disputed.

Whether credit inflation has been brought about is a

matter upon which opinions may differ; nevertheless, there appear to be abundant
fasts to support the contention.

It depends,

upon the degree of expansion

against our stock of gold and, second, upon the uses to which bank credit has been
put.
Congressman Strong, sponsor for a bill which seeks to compel the Federal Reserve System to stabilize the purchasing power of money through the control of
prices, stated, in effect, in a speech before the Stable Money Association in
Washington on December 30, that if his bill had been in operation, the officers of
the Federal Reserve System would not have permitted the extension of credit and
low rates of discount and the purchase of Government sscurities, which made possible the continuation of inflation after the war, nor encouraged the deflation that
followed.

I am simply quoting Congressman Strong's statement without assuming re-

sponsibility for his opinion.

I believe his bill to be a vicious one, but it has

received and is receiving a most amazing amount of attention, and he contends that
the hearings before his Committee constitute the best text book in existence on
the Federal Reserve System.

That also may be disputed.

It is, however, a fact that the Federal Reserve System was the instrument of
expansion during the war and of inflation afterward.
VOLUME 176, PAGE 127



It was the System alone

•
which rendered possible the financing of the war, but it was also the System which
was responsible for inflation afterward, under influences which, perhaps, could
not be controlled.

After credit had become expanded in financing the war, as far

as prudence, perhaps, should have gone, it afterward became expanded to an imprudent degree, until it was brought up against the limitation of reserves fixed by
law.
The Federal Reserve System is now responsible for the expanded condition of
credit, which I believe it is fair to call inflation, and whatever the influences
which have tended to bring about the present state of expansion, the action of the
System cannot be characterized otherwise than as deliberate, and the responsibilities for results are upon it.
The use of this expanded credit has been beneficent in very large part.

It

has aided us in financing the rehabilitation of the world, and it has fostered
the growth of business and of construction in the country, but that it has gone
too far or far enough is my belief.
Sir George Paish, well known in this country, formerly the editor of one of
England's best known financial papers, is quoted in the TARIFF REVIEW for November
as holding the view that in the United States the amount of credit has been expanded to unbelievable dimensions; that the greater part of new credit created by the
new banking law and the gold imports has already been exhausted and banking credit
in future must be on a much lower scale; and that should new credit continue to be
created on the scale of recent years all available supplies will soon be used up.
I believe that to be a fact susceptible to proof.

Sir George Paish seems to be

the only Englishman whose public utterances comprehend the fact that we have not
only not sterilized or demonetized the gold which we have imported, as many writers
claim, but that we have given it almost the greatest fertility possible.
Credit has been expanded to a degree practically as great as that which existed.




at the height of the inflation after the close of the war.

Federal reserve credit

has not been called on to the same extent; and, under conditions as they are, there
remains a greater fund of unexpended credit power in the System than was the case
at the height of expansion after the war.

But measuring our expansion by the a-

mount of the reserves of member banks in proportion to the volume of credit granted
by them, or by the amount of our stock of gold in proportion to

ep.n

deposits

of the country, the degree of expansion is as great now as it was during the well
known inflation period to which I have alluded, except for a part of the year of
1920 after so-called deflation had set in, and after we had lost about 300 million
PS llars net by gold export, when the ratio of our stock of gold to bank deposits
and our money supply was at the lowest point reached in modern times (6.3%).
Our stock of gold is not only the reserve for the redemption of bank deposits
but, also, for the redemption of all forms of our currency, and when considering
the ratio which our gold stock bears to credit expansion, we should also include
our total stock of money as well as the total amount of the inddual bank deposits of the country.

On June 30, 1920, the ratio of our stock of gold to these

two forms of liability was only 6.3%.
was 9.13%.

On June 30, 1918, two years previous, it

On June 30, 1921, when about 400 mon dollars in gold had come

back to us, the ratio was 7.5%.

It rose to 8.6% on June 30, 1924, but it is

now only
The degree of expansion can be illustrated in another way.

On June 30, 1920,

member banks had extended credit 14.2 times the amount of their reserve balances.
On June 30, 1927, the amount of credit extended was equal to 14.7 times their reserve
balances.

On this latter date, they were not borrowing as much from the Federal

reserve banks as they were in June, 1920.
June, 1920 (total

sasa

They were borrowing 2,831 millions in

only 693 millions on the same date in 1927.*

In 1920,

however, the reason for their borrowing such a large amount was due to the extraordi* On Government Securities,



1920
1927

$637 Million
"
274

nary S emand for currency in the general circulation.

The proceeds of their

discounts had to be withdrawn in currency and could not be left to increase
their reserve balances and thus enable them to still further expand their credit.
This will be more fully explained later on.
To further illustrate the degree of expansion, or inflation, it will be
stated that the amount of reserves carried by member banks, in relation to their
total deposits, on June 30, 1920, was 7.245; on June 30, 1927, it was only 6.4551".
While the difference seems small in percentage, a better idea will be given
to state that if they had been carrying on June 30, 1927, the same percentage of
reserve (against total deposits) which they were carrying in 1920, it would have
required about 280 million dollars more reserve.

The reason why the percentage

of reserve is so low at the present time is because of the extraordinary growth
of time deposits, against which only 35" reserve is required.
To still further illustrate the degree of expansion, it will be stated that
the cash reserve of all state nonmember banks on June 30, 1927 (figured from the
Comptroller's reports), was only 3.35' of the individual deposit liabilities.
This, of course, does not take into account balances with other banks, which are
not a true reserve.

On June 30, 1921, the cash reserves of these same nonmem-

ber state banks were 3.V, of the individual deposit liabilities.
Now, whether this growth of credit may be called expansion or inflation depends in very large measure upon the purpose to which it has been put.

It has

not been devoted to purposes of trade and commerce, at least, not directly, if at
all.

It has gone very largely into the purchase of securities and loans upon

secures, -- which represent mainly all kinds of construction work, -- and in
loans upon real estate.

In other words, the whole of the increase in the amount

of credit extended since June 30, 1921, has been for these purposes rather than
for the purpose 5f financing current trade and commerce.




This appears to b5

proved incontestably by an analysis of the classcation of the loans and investments of member banks between 1921 and 1927.

As nearly as may be determined,

loans of member banks on secures between these two dates have increased about
3,250 mons and investments about 3,700 millions.
The loans on real estate of all member banks on June 30, 1927, had reached
the amazing total of 2,900 millions.

Going back to 1921, we find that the total

of all loans made by national banks against real estate in all forms was only
280 mon dollars.

We have no statistical information of the loans of the state

member banks on real estate at that time, but the total loans of these state member
banks were only about one-third of the loans of national banks, and granting that
the loans of these state members on real estate were as large as the loans of all
the national banks, and so estimating the total real estate loans of all members
at that time as 560 mons, it would indicate an increase of loans on real
estate of nearly 2,400 mons.
as:

If that is the true condon, -- which is

to very little if any doubt, -- then,

the loans for commercial purposes

between June 30, 1921, and June 30, 1927, actually decreased about 500 million
dollars.

This is in line with a recent estimate made of the situation by Dr.

Benj. M. Anderson, Economist of the Chase National Bank.

He estimates that the

the need of credit for commercial purposes is now only about 9q of what it was
in 1919.
The causes of
1.

eaxpanson of credit are the following:

The large addon to our gold supply, which serves as a basis for expan-

sion under the influence of other causes.
2.




The creation of excess reserve balances, from time to time, by the re-

discount of paper, by the sale of bills to Federal reserve banks, and by
the use of Federal reserve funds in the market
ment secures.

na; purchase of Govern-

There is always a considerable volume of paper under

rediscount with Federal reserve banks, and while the average amount of

-6Federal reserve4lIedit has fluctuated but little, the last three or four
years, there is always an appreciable volume in use, and it has remained
constant with a tendency to increase, while the credit power of the
member banks has materially increased from other causes.
3.

The diminished use and need of currency in relation to the volume of

bank deposits.
4.

The attenuation of required bank reserves by reason of the growth or

classification of deposits as "time deposits."
Contributory Causes
5.

The accumulation and employment in our money market of abnormally

large foreign balances, which formerly would, doubtless, have been
withdrawn, causing gold exports.
6.

The present low discount rate.

These causes will be discussed in order.
1.

The increase in our stock of gold during the period under review, 1921-

1927, was 1,313 million dollars, or 40).

(Since June 30, the stock of gold has

been decreased substantially by export and earmarking.)

This gold naturally

found its way in large part into Federal reserve banks, paying off borrowings
in large part and creating excess balances, against which a large credit struotura could be built up.
2.

The process is too well understood to need elaboration.

Aiding in the maintenance of this credit structure has been the contin-

ued employment of Federal reserve funds -- quite large in the aggregate -- in
the money market.

It is to be said that the volume of Federal reserve funds in

use has not varied very widely since 1924 (except during short periods), but it
has tended toward increase as shown in the following table:
Earning Assets Federal Reserve Banks

June 30 -1924
Bills Discounted
and Bought,
$395
Investments,
431
Total,
$826



(In Millions)
1926
1927

1925
697
335
$1,032

$

764
393
$1,157

(3

$

693
377
$1,070

December 21 -- 1927
$

944
688
$1,63p

1926
$1,103
317
$1,420

•

•

Earning assets of Federal reserve banks may be said to be acquired in two ways,
by positive and voluntary action in making investments and by negative action in
simply aocepting paper offered for rediscount and purchase.

As is well under-

stood, member bank balances in Federal reserve banks, however

created, whether

by the deposit of gold, or any other acceptable funds, or by rediscounting, or by
the sale of securities to Federal reserve banks, constitute reserve.
excess reserve so created that credit can be expanded.

It is upon

The degree to which bank

oredit can be expanded against a dollar of excess reserve cannot be expressed in
any formula.

The process is too complicated and there are too many influences and

cross currents at work.

The limit of expansion is, of course, governed by the

ability to maintain the required reserve against deposit liabilities, but deposits,
taking the banking situation as a whole, are built up chiefly by or through the
granting of loans.

When loans are made, the proceeds are either passed to the

credit of the borrower or he is paid in currency, or partly both; when he checks
against his deposit (proceeds of his loan) or when he receives currency in payment,
his check or the currency, as the case may be, finds its way into some other
bank as a deposit.
3.

Aiding very greatly in augmenting the quantity of bank oredit possible to

be issued is one influence to which little attention has been given, that is, the
diminishing uses of currency in proportion to the volume of credit employed.

The

volume of currency used in the general circulation bears a close relation to the
volume of credit in use or to the volume of bank deposits.
is not a constant one.

The relation, however,

It would be more exact to say that it bears an intimate re-

lation to the volume of credit granted for industrial purposes.

That a great part

of the bank credit recently granted was not for commercial or industrial uses is
shown by lack of a corresponding increase in the currency circulation.

In fact,

there has been a decrease in the general circulation since 1921, as shown below.
Enlarged payrolls, for whatever purposes, usually call for more currency.

Extraor-

dinary payments, such as those involved in war-time operations for all purposes,



•

-8-

•
require an enlarged volume of currenoy.
It has been recognized that, in considering what volume of credit could be
granted or would naturally result from an initial increase in bank reserves, it
would first be necessary to determine what portion of the increase would become
absorbed for currency purposes.

In the light of experience of former times,

these estimates have varied very widely -one.

from two or three to one to ten to

The actual ratio worked out in practice at different times varies so

widely that it is useless to attempt to express it in a formula; we can only
state results.

To illustrate;

Coincident with the addition of 223 million

dollars to the stock of gold between June 30, 1925, and June 30, 1927, bank credit in use (total bank deposits) expanded 21i to 1 of the increase.

The gold went

into the reserve banks and the amount of currency in general circulation increased
only 29 million dollars between the dates mentioned.

Furthermore, the amount of

money in general circulation on June 30, 1921, was 4,819 millions, while on June
30, 1927, it was only 4,743 millions, a decrease of 76 millions, the amount of
credit (total individual deposits all banks) having increased 17,408 millions
in the meantime.

Differences in the price level affect the volume of circulation.

It will be found upon examination that wide variations in the relation between
the amount of currency in circulation and the volume of credit outstanding at given
dates have always existed, and that the ratio has been a declining one for many
years, with interruptions due to special causes.

In 1910, the ratio of currency

in general circulation to the volume of individual deposits was, approximately,
24; in 1927, it was 9.04.

The following table will show the relation from 1918

to 1927:
1918
June 30 *Money in general
Circulation (outside
Treasury & F.R.Bks.),$ 4,406
Bank Credit - Individual Deposits all
Reporting Banks,
27,808
Ratio Per Cent.,
15.84
*Treasury Revised Figures.




1921

1925
1924
(In Millions)

192$

1927

$ 4,819

$ 4,752

$ 4,714

$ 4,781

$ 4,743

34,842
13.83

43,619
10.9

47,466
9.93

49,537
9.65

52,250
9.08

-9If currency requireets in proportion to the volume411 bank deposits (sometimes called deposit currency) on June 30, 1927, had been as great as they were
in 1921, we would have needed on June 30, 1927, a much larger volume of currency,
estimated to be 2,483 mon dollars, in addition to the amount then in general
Iirculation, and even if the requirements had been only relatively as large as
they were on a more recent date, say June 30, 1924, we would have needed an addition to our currency of 933 mons.

There is only one source from which that

addonal amount of currency, if needed, could be obtained and that is from
Federal reserve banks, and it could be obtained only in one way, by rediscounting and borrowing unless, possibly, by the sale of secures to Federal reserve
If the larger amount were added to the present circulation in Federal

banks.

reserve notes and the other factors in the System statement of December 21 remained
the same (except, of course, earning assets), the reserve ratio would have been reduced practically to the low point of 1920, and if the smaller amount of notes were
added, the reserve ratio would have been reduced to 55.*
Nothing appears in sight to call for such an increase in circulation.

Should

any extraordinary occasion arise which would demand it, it would, of course, have
a far-reaching effect upon the credit supply.
currency springs up

Annually an increased demand for

na- fall of the year, usually reaching its height

na:

holiday season, when the volume of Federal reserve notes in circulation increases
about 200 mon dollars.

This currency usually flows back into the banks in

January, and is deposited in Federal reserve banks and serves to pay off loans,
through which it was obtained.
At the height of inflation, or in the latter part of 1920, the amount of bills
disoounted and bought by Federal reserve banks was more than 3,000 mon dollars
anI the amount of Federal reserve currency outstanding in the neighborhood of 3,400
millions.

Practically the entire proceeds of paper rediscounted with and bills

sold to the Federal reserve banks was needed to meet the demands for currency.
*It

It

to be noted that an increase in the currency circulation brought about in

this way would not increase the degree of credit expansion of member banks here reIt would, of course, reduce the Federal
ferred to unless it involved new loans.
stated.
as
however,
ratio,
reserve



-10-

S

•

is manifest that if the need for currency had not been so great and that if the
member banks could have left the proceeds of rediscounts with the reserve banks to
increase their balances instead of having to withdraw it in currency, only a small
part of the borrowing then done would have been necessary, and the amount of credit
which could have been granted would have been enormously greater without so seriously affecting the reserve ratio.

So now upon a moderate increase in excess reserves,

created by rediscounting or otherwise, a huge amount of credit in the aggregate can
be extended, but if proceeds of rediscounts must be withdrawn in currency for employment in the general circulation, obviously, no increase in reserve balances
will take place and the basis for the extension of credit will not be enlarged.
4.

Between 1921 and 1927, the increase in time deposits of member banks has

been considerably larger in amount than the increase in demand deposits (individual).

The percentage of increase has been very much greater, as shown in the fol-

lowing tabulation:
Time Deposits
Individual Demand Deposits Member Banks
(In Millions)
$ 6,366
$13,855
June 30, 1921,
12 209
18 800
" 30, 1927,
$ 5,843 = 91.8g
$ 4,945 = 35.7
Increase,

There is little, if any, doubt that a very considerable proportion of deposits
classified as "time" is to all intents and purposes the equivalent of demand deposits in character; by this, it is not meant to say that the law is being violated in
classification.
If

log

of these "time" deposits is properly to be classified as demand, the ad-

ditional reserve which would be required would be about 70 million dollars; if 20,
141 millions; and if 255;, -- which is not believed to be, by any means, an extravagant estimate, -- 177 millions additional reserve would be required.
It is not an idle question whether bank reserves have become too attenuated,
and it is to be doubted that, when reserve requirements were changed by the amendment to the Act in 1917, anybody thought they would eventually be reduced to the



111

_11_

low average of 7.45r, of deposit liabilities.

Our gold supply, as great as it is

cried out to be, is only 7.51 of the aggregate of individual deposit liabilities of all reporting banks and our total stock of money.
5.--

The Accumulations of Foreign Balances in this Country.

The Department of Commerce has estimated that the net amount of these balances due to foreigners at the close of 1926, notwithstanding our favorable trade
balances for several years, was considerably in excess of a billion dollars.
probably as great or greater now.

It is

While, so far as is known, there is no overhang-

ing threat of withdrawal of these balances in volume, and while it may be -- and
doubtless is -- to the present interest of foreign creditors to maintain these
balances, it cannot be said that the control of the gold, into which the balances
and investments could be converted, lies in our hands.

Their balances, in large

part at least, are said to figure in the reserve of foreign banks while being
employed here.
6.--

The Discount Rate.

Little is needed to be said in this connection.
that low interest rates foster industry.

The general assumption is

That is undoubtedly true within bounds.

It is also true that the quantity of credit and currency in a country should bear
a well-balanced relation to its economic development.

Overbuilding and over-

speculation and inflation of prices, in one direction or another, inevitably grow
out of an excessive credit supply and accompany the excessive use of cheap credit
for a prolonged period.

Destructive competition and unsound investment in quest

of profits, also, often accompany it, in the banking as well as in the industrial
field; this is particularly true when unduly low interest rates are brought about
artificially.

Commerce and industry are supposed to have learned a lesson from

costly experience in 1919 and 1920.

We have, therefore, for that and other rea-

sons avoided inflation of commodity prices, which affect the cost of living, but
it is as plain as daylight that we have run deeply into inflation in other directions.

There is no blinking the fact of credit inflation, tested by all banking

standards.




-12•

.
•

How far is Sir George Paish justified in his statement that should new credit continue to be created on the scale of recent years all available supplies
will soon be used up?

What margin of safety have we?

nature of the demand for credit.
about 52 billion dollars.

That depends upon the

The total bank deposits of the country are

If any emergency should arise which would call for

the payment of as much as 5f, of these deposits in currency (taking only 2,500
millions), which could only be procured from the Federal reserve banks and probably the only practical way of getting it would be by borrowing, it would bring
the reserve ratio right up against the legal limit.

It is true that the Reserve

System could replenish its supply of gold by gathering in, if and when presented,
the gold certificates which are now in general circulation, amounting to about
one billion dollars.

They would, however, have to substitute their own notes

in like amount and 40;!, of the gold thus gathered in, or, say, 400 million dollars, would be required as reserve against the Federal reserve notes issued.

If

at the same time we should be called upon to export a billion dollars in gold,
a very great further strain would be put upon the situation.

That may be as

much as to say that, if the skies were to fall, all the larks would be caught.
It serves, however, to illustrate the unexpended credit power of the Federal
Reserve System, and it is none too much in fair weather times.

On the other hand,

a relatively small addition to the aggregate amount of member bank reserves,
whether created by borrowing or otherwise, will admit of expansion of credit at
the rate of about 14 to 1 if worked up into deposits in the usual way, and from
this point of view the unused credit rower of the Federal Reserve System is very
large. But we must always keep our eyes upon the stock of gold.

Should we lose a

billion dollars in gold from the stock which was held on June 30 and should other
conditions in the bank statement remain the same, then, the ratio of our stock of
gold to the amount of bank deposits and our stock of currency would be under

6,

a low ratio which has never yet been reached and there are few who would permit
it to stand.



This last eventuality is not even beyond the bounds of probability.

-13CONCLUSION.

After all is said, we must be judged by the final result:

Credit has been ex-

panded to approximately the highest ratio ever experienced; the resources of the
banks have become less and less liquid; the excess of credit has been employed not
for commercial purposes but for investment and speculative purposes; prices have
become inflated -- not the prices of commodities but the prices of "capital goods,"
corporate securities, and real estate; speculation im securities under the influence of superabundant and cheap money has reached the highest level ever known
during a time of trade reaction; and the stage seems set for further excesses and
greater absorption of oredit.
The avowed purpose of the employment of Federal reserve funds is to stabilize
the supply of credit; the result has been to increase and ever increase it, beyond
the apparent needs of commerce.

The amount of Federal reserve credit deliberate-

ly put out has not increased notably, except for short periods, within the last
few years, but it has not diminished as the market supply, by which is meant the
total supply, has increased, that is, while the power of the banks of the country
to supply credit was increasing from other causes.
serves as a base for additional supply of credit.
the open market serves the same end.

An increased supply of gold
Federal reserve funds used in

The import of gold in the last six years

apparently was a sufficient base for the supply of credit without the addition of
investment funds from the Federal Reserve System.

It is through the continued

use of such funds that the supply and use of credit has become excessive.

The

use of Federal reserve funds has brought down the open market rate, and forced the
reduction of the discount rate, thus bringing about an artificial situation.
Inflation grows by what it feeds upon.

As in the case of the drug addict,

more and more is needed to keep the economic body going.

So while Federal reserve

funds have been used to stabilize credit for short periods and prevent wide but
temporary fluctuations in the interest rate, which usually serve



to correct

•

e•

-14-

excesscs, the use of these funds over a long period has brought about-inflation
of credit,

ThatHver purpose,,, were sought, this is the result.

Whether the

good balances the ill eff,ct and the possible ills yet to come -- and apparently
imminent -- may be a matter of opinion.

I am not unacquainted with the argments

and the purposes which it was sought to achieve.

For one thing, it is argued

that in using bank funds for investments and for loans on securities to so great
extent, the banks are now investment institutions and but act as intermediaries
between depositors and the vendors of securities, employing their time deposits
in this way, and that the amount so invested and loaned is but a small percentage
of the new securities issued.
not sound by any means.

There is something in this contention, but it is

To the extent that securities have been issued for the

purpose of raising permanent working capital, the banks of the country have been
relieved of demands upon them for current working purposes -- that much is true;
but their liability against deposits remains.

Moreover, the banks by expanding

their credit, through Federal reserve credit injected into the market, create deposits, potential purchasing power, and thus originate the funds which they later
put into securities, and so the chain lengthens out.

It is also argued that, in

creaAng a plentiful supply of credit and low interest rates, we have avoided
still further gold imports, which would have accomplished further expansion of
credit in any event.

In view of the accumulation of tremendous exchange balances

here, a Scotch verdict may be rendered against that contention -- not proven.
Means were undoubtedly available to avoid the export of gold to this country, which
in the long run would have proved less disadvantageous to this country than the
present course is apt to prove.

If the foreigners choose to let gold come, it

will comc; if they choose to call for the gold represented by their balances, they
can get it.




-15-

There are two ways to correct the present situation: first, by the sale of
the investment socurities of tho System, and, second, by raising the discount
rate.

It seems to me time to apply a moderately corrective influence by moans

of the discount rate, and I am of the opinion that the rate of this bank should
now be raised.

RICHMOND, VIRGINIA,
January 6, 1928.