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The Papers of Charles Hamlin (mss24661) 361_11_001- Hamlin, Charles S., Scrap Book — Volume 187, FRBoard Members 205.001 - Hamlin Charles S Scrap Book - Volume 187 FRBoard Members 1.) BOARD OF GOVERNORS OF THE • FEDERAL RESERVE SYSTEM Office Correspondence To From The Files Dee July 25, 1941 Subject: Mr. Coe ^ffiAl After 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 187 of Mr. Hamlin's scrap book and placed in the Board's files: VOLUME 187 Page 1.,2 • Memo to Board from Mr. Goldenweiser re Member Bank Reserve Requirements. Page 17 Preliminary Memorandum for the Open Market Investment Committee, January 7, 1929. Page 56 Letter to Mr. Hamlin from Governor Harding re continuous borrowing of member banks - Has Board meeting stamp. Page 70 Memo to Board from Mr. Smead re Bank Suspensions - Year 1928. Page 81 (X-6223) Examination of Member Banks. Page 107 Memo on firming tendencies of the money market by Dr. Miller. Page 120 Earnings & Expenses of F.R. Banks - December 1928. Page 131 Letter to Board members and member banks re financial condition in Boston District asking cooperation to avert serious developments signed by Gov. Harding. Page 137 Discounted bills held by each F.R. Bank. • CONFIDENTIAL November 8, 1928 FEDERAL RES'UlTr, BOARD Subject: From: 44, Mr. Goldenweiser Member Bank Reserve • Requirements Banc reserves are at the heart of our banking structure and their level and incidence are an important factor in the course of bank credit and of trade and industry. They also have a bearing on international Fold movements and largely through this channel on econonic conditions throughout the world. Re- serve requirements as now constituted, however, being an outgrowth of n long historical evolution, do not represent a harmonious, logical plan devised with a clearly defined purpose. In view of the im)ortance of the problem and of the consideration that has been given by the Federal reserve system to plans for revising legal requirements, it is proposed in this memorandum to consider briefly the economic functions of bank reserves and to review existing requirements and proposed changes with reference to the purposes that reserves are desiuned to accomplish. Purpose et reserves In discussions of bank reserves, it is generally taken for •c, .ranted that their principal purpose has to do with the safety of bank deoosits and notes. It is usually not made entirely clear whether that safety should depend primarily on the ability of banks to meet their liabilities on demand, or whether reserves should chiefly aim at maintaining public confidence in the sa'ety of their banic notes and deposits. In this conceytion of reserves there is implied as an incidental function the limitation of bank expansion, since, to use familiar and inaccurate terms, a bunk cannot lend all the money that is deposited with it, but must reserve a part of it to meet current demands. This re- quirement of law or prudence, us the case may be, limits the amouat that the VOLUME 187 PAGE 13 • 2 bal.-1'c can lend. At the time when the Federal reserve s7sten was established there appeared to be recog:Azed a farther parpose of member bank reserve re- qairements, namely, to provide for the use of the reserve banks sufficient funds to insure their ability to meet expenses and to influence credit conditions. Whatever the validity of the safety principle of reserves may have been .1111••••••••••••• in the past, it appears not to be applicable to .nodern . conditions. A bank that has a large amount of eligible paper that can be melted down at any time at the reserve bank is in a better position to meet sudden demands upon it and inspires serves. reater confidence in its depositors than a barft that has ample reThe further purpose of reserves under the reserve system of supplying the reserve bunks with working finds, though it meets a fundamental requirement of the situ.tion, could be accomplished by other devices, either through provisions in rf...rLrd to currency issues, through increL.sed capital requirements, throu ess:sszients on member banks, or even through taxation. As a test of the equity and validity of existin7 reserve requirements, this principle of reserves would not be adequate. Under present conditions, it would appear that the principal purpose of bank reserves is that implied incidentally in the safety principle, namely, to set a limit on the expansion of bank credit. It is in the light of this principle that it is proposed in the following pages to review existing reserve reatirments and ch_in7es that are under considere.tion. Differentials between classes of deposits Existing reserve requirements carry a series of differentials between different classes of deJosits aid different classes of cities. The priyicipal differentiat between classes of de2osits is that between time and demand deposits. From the )oint of view of the principle of credit control, an argu- ment can be ?lade for lower reserve reouire:Aents against time deposits on the I -3 generd ground th-t the growth of time deoosits, unlike the r;rowth of demand deposits, does not in general arise directly from Am expansion of bank lo-Ins, and ti.t such deposits, unlike bank notes and demand deeosits, are not generally used as means of payment. The distinction between. time and demand de- posits in this respect, however, is not clear-cut even in principle. There is a graduated series of different kinds of funds in the hinds of the public, the successive steps of w'lich are active demand deposits, inactive dem-Ind deposits; active time deposits; inactive time deoosits; permanent savings deposits; shorttime investments. The line between time and demand deposits, from the point of view of their relationship to the growth of bank credit and of the amount of reserves that should be carried against them, could logically be drawn at variow points in this series. Drawing the distinction between deoc sits ragairin7 30 days notice of withdrawal and not requirinc7 such notice may be a reasonably satisfactory compromise which has precedent and, historical tradition in its favor. It is doubtful, however, whether it is possible as a matter of admin- istration to define time deposits so as to limit them to what actually represents the country's szvings. It is the r,,oid growth of time deposits with their low reserve requirenents that has _11.tcle possible an enormous growth of bank credit since 1922 with little increase in member bAnk reserve requiremeats. If the purpose of reserves is to control credit expansion, it is doubt- ful whether a condition is satisf:Lctor:r which permits a growth of $2,500,000,000 in member bank lcans and investrionts with only $30,000,000 of increse in reserve reqairements, as happened during the year ending in June, 1928. Growth of bank credit without corresponding ,!:rowth of reserves is in fact one of the import ,nt re,sons why the question of reserve requirements is under consideration. In the light of existing information, it would seem that revision should be in the dirJction of diminishing or eliminating altogether the differential between reserve requirements against time and demand deposits, rather than in 4 - the direction of attempts to regulate the nature of time deposits through more refined administrative provisions. Another differential is that which exempts Government deposits from all reserve reouirements. This differential is generally defended on the ground that these deposits are secured by Government obligations. From the point of view of credit control, however, the security back of deposits has no bearing on the necessity for reserves. Since funds represented by Government de- posits are part of the general volume of bank credit and of the public's aggregate means of payment, these deposits should be treated as to reserve requirements ma the same basis as any other demand deposits. A differential between classes of deposits which does not prevail at present but which has been proposed is a provision of higher reserve reouirements for inter-bank deposits, or so-called bankers' balances. The theory underlying this proposal is that bankers' balances are subject to wider fluctuations and to more abrupt withdrawals than other deposits and consequently should be protected by higher reserves. On the principle of credit control, which underlies this memorandum, this argument alone is not adequate to support the proposal. If it is true that bankers' balances should carry higher reserves, the reasons for the differential would have to do with the function of these balances as legal reserves of nonmember bans and as oPerating reserves of country member banks. It may be that these balances, which themselves are in the nature of reserves, have a peculiar relation to the growth of bank credit, and for that re.A.son may require higher reserves. Before such u decision is reached, however, it would auve to be determined in what way these balances function in relation to the growth of bank cred4A, and whether somewhat higher reserve requirements placed upon them would serve a useful purpose in strengthening the means of control over credit expansion. 5 Differentials between classes oC cities Another set of differentials in existing reserve requirelents is be.sed on the char .cter of the cities in which the b.Lnics are Loctted. differontiAs is not clear. Tho btsis of those It would -ppa_r '1-1 A from the point of vi:w of setfetj reserv) riquir;mmts in th.; ler centers should bJ lor.'er because they L.r: in _1 bettor )osition to repledish .thJir reservJs by berrowin -r from the reserve b LI:CS. It is true th:t Ueposits of the be.n',cs in the 1.:ror cities h NJ a grJLter veloeity th,n those of country b,ncs, but velocity of circulation hes little be.rinc5 on the safety o' deiosits so long ts their tot-1 volume remtLins rehttively constant. 7ithdr_was by one „crroup of depositors comoense.ted by deposits by e.nothJr 7roup reeult in incresed turnovor of deposits but cause no str,in uPon baTc. On the s_Ifet7 principle tbraptnJss e.nd m _gnitude o-" with- dr,wds r ther th..n velocity ous7ht t) determine tile volunie rxitired reserves. From the point ofl view of credit control, however, -Lbruptness or rithdr.ei-als S5 es not constitute •t proper btsis for differ)tils in resorve reoairements. When the present differentials were originally determined in pre-Federal reserve days, ther were based essentially on the saine principle as the proposal now -lade for higher reserves for bankers' balances. The evident intention was to reach deposits located in the financial centers which constituted a laneee part of the reserves of other banks and which, ae a consequence, were especially important and particularly subject to larTe and abrupt withdrawals. At the present time add 3n the )rinciple of control of credit expansion, these reasons for ferenthls between b.incs in differedt cities are no lonTer conclusive, and no others h_Lve been formulated. Recoemizin(r the lac'c of essentiul loric in existin reserve differentials S etween cities, one o - the proposals under oonsideration by the system provides that hi,s-her rates of reserves be rpcluired 'or ilew York and Chicar us the principal fin tnciztl centers .tnd int)raediate ones for such other citi)s .ts have -6 Federal reserve banks or branches. This proposA. app,rentfy is based on the desire to have established equitable apoortionment of reserves by artkin-9,. banks in cities with reserve facilities, T'aich require less vault cash, carry larger balances with the reserve 'binks to offset that advantaze. The existinp level of reserves, it should be noted, is the result of allowances made for the larger cash holdings carried by country 'bans. In substaice existing reserve requirements count .,s reserves, not only balances with the reserve b'Inr,-q, but also vault cash, only the amount of vault c.,,sh required is left to the iudgment J of the banks, while the mount of the balances is determined by 12w. As 2 means of ironing out differences between banks in different cities in regard to the volume of actual reserves, .,risin7 from different vault cash requirclents, the proposal 11s merit. If properly ,cldusted to condition:, it would amount in effect to in abandonment or geogr_lphic.d differentials in reserve requirements. From the point of view of cr3dit control, however, the question still remains whether deposits in different classes of cities may not have different siz7nificance in relation to the gener,t1 course of bank credit. If a distinction of that sort exists and c -In be defined, then the classification of cities throughout the country should be reviewed with reference to this characteristic. It my be that such an exLmination would reveal no sufficient differences between cities to jutifzr differentials, but in any case it is clear that differentials between banks based on geogr-phicd loctions must be iustified by -4, different character or behavior of bank credit in different localities. A determination of such differences and of their bearing on reserve re- quirements presents a difficult tnd com)lex problem, the solution of which should precede a revision of existing differentials. 7 Differanti-1 .4.,.;%Linst currency Another differentLa inherent in the existing system of reserves is the differential -,g_tinst currency. This differentia is not generally reco;nized, but is nevertheless the most powerful differentiA in the entire reserve structure. Under existing,: hor, when -t person borrows money from a bank in order to have a deposit Account against which he may draw checks, the bank needs to hold on the average 7.5 per cent reserves ag_:.Linst the proceeds of the loan. This means, under normal conditions, since banks usually have no excess reserve-, th.A the b,alic needs to borrow tly.,t amount from the reserve bank. If, however, the person who borrows the money wants to withdraw it in cash, the member bank, since it carries no more vault cash th:,11 it requires, has to borrow the full amount of the loan from the reserve bunk. In effect, tharerore, the present 1_,.w requires a 100 per cunt reserve against lotns resultinn. in cash withdrawils, while it requires only a 7 1/2 per cent reserve against loans resulting in the creation of deposits. When consjdered in the light of the usual course of economic dovelcoments this discrimination against currency is not logical. I The predicate for bank inflation is laid It the time when lo.ns are granted for the parose of creating deposits out of which payments are mtde by check for an ( increase of inventories, the purchase of .Tiftterials, etc. A demand or cash does not develop until after the fabrication of the materials has given rise to larger p,tyrolls, or until the additional purchasing power has resulted in an advance of rettil prices cLusing 1 need for more pocket money. Furthermore, at the time when ,I. demand for additional currency develops it is usually to late to prevent ar inflation of credit. The banks can refuse a loan at the tile whun it is rc,qaested but cannot, without suspendin7, refuse to ply out cash to those who have deposits previous17 created. A heavy pressure on banks at the • —8 stvse of credit developments when c)_sh i wanted is too late to preventinfla- tion and is likely to make deflation more abrupt and p,inful. On this ground it may be desirable to raise for consideration the existin, - differential against that part of purchasing power that is withdrawn in the form of currency, and to canvass the pmssibility of establishing a system of reserves that would impose more nearly equal reserve requirements on deposit currency and on actual cash. Reserves of nonmember banks A picture of the reserve structure in order to be complete must include banks that are not members of the Federal reserve s-Tstem. These banks control I about one-third of the banking resources of the country and this proportion may increase at any time that irksome reserve realirements imposed on member banks result in withdrawals from the system. At the present time reserves of non- member banks consist chiefly of a small amount of cash in vault and of balances held largely with member banks. Since the cash has to be obtained from the re- serve banks and since balances with the member banks r,auira in turn rserves with the reserve banks - the volume of7 credit of nonmember banks is definitely linked with the reserve systen. The link, however, 1:1 a slender one, and a large expansion of nonmember bank credit can take place on the basis of a very small increase in the reserves of member banks. diate solution of this difficulty is possible, It is realized that no immeThe ultilate solution may lie in the direction of a gradual absorption by the system of all the banks in the country, or in the direction of a gradual adoption of standard reserve requirements by state legislatures. It should, in any case, constitute a part of a complete /program of revision of reserve requirements that may be adopted by the 1?ederal reserve system. • 9 Deductims One of the phases of existing reserve requirements which it has been proposed to revise are certain technicalities connected with deductions of amounts due from banks in the computation of net demand depo-itr. under consideration. Various plans arc From the point of view of credit control, it is clear that the total amount or inter-bank depos its should be deducted in arriving at the fiTure against which reserves must be carried. Deposits by one bank with another do not r)sult in additional loans and invest:lents or in additional purchasing power in the hands of the public. When one bunk foregoes the investment of funds and passes it on to another bank, which rfikes use of the funds, there is no reason, from the point of view of cr:di t control, why this mount should be counted more th,,J1 4 Reserves and the gold standard The ultimate reserves of our banking structure rest with the Federal reserve banks, which must hold a 40 and 35 per cent reserve, respectively, ap-ainst their liabilities on Federal r ;:erve notes and on deoosits. Reserve requirements of the reserve bans, therefor, depen d on the dem.00d of the public for curre ncy and the demand of member banks for r.s.r v,; balances, vhilh in turn depend on the deposit of the !:wmb,r banics themselvps.. The large r the reserve requirements of member banks, therefore, the larger 'yin be the dem_nd for reperveF by the T....serve binks. Through this channel reserve requir:ments impos ed upon member banks are a factor in the gold requirements of the reserve banks and, therefore, of the country as a whole . In plannin: , a revision of reserve regairements it should, therefore, be kept in mind what effect- such a revision rri%y have upon the c, untry's demand for gold. This demand should in general not be such is to subject the worll supply of gold to i strain that would result in • • - lT - sorioasly disturbing cridit c,nditions ;Ibroal. Too l..re o1d dem ,nds by - ney rtes here .ad woild subjL;ct the this country would necessit.te higher 11 ) r3st of the world to the LdtJrn.tive of either losin7 gold or rtisin- their money r.tt_s. In oith,..,r c.sJ it might .ct course of tr2.de ,nd industry. quirem,nts s serious h ndic .p to the norm.l It is liocess.ry, th'7.r.;fore, to 11.1w2 reserve reof the rosrv. b ns b3 ad justod to re;Lson- ") s would not seriously %.ble expectations of such additions to our gp1-1 supply disturb fin.nci )1 conditi-ns abroad. A pr per level of reserves in this country is ,n import at factor in the llint.,nnca and proper functioninc- of th: international gold standard. Conclusion In the preceding 139.g...;.s, an effort has been lade to determine th,,, principle on which reserve require.lents should be based and to review existn ...nd proposed recluirements in the light of that principle. It has been indi- cated what reqairements or proposals appear to be in line with whit apoe'ars to be the best principle of reserves and what requirements seem to be inconsistent with it. Even such proposals, however, as -r.J in lin_ with the correct prin- ciple of reserv..,s rn....y not be adv.,nt._47eous if udopt2d by themselves without a general r,vision of the entire r.er-orv structure. vor x.!,.aple, doduction of -Nunts du to b_-,nks ,appears1 bank bA.tnces from gross deposits instead )f frozi .1,due to be _ .-1-ve in the right direction. The Limediat9 effect of such a measure by itself, however, would be to diminish the reserve requirements or banks without naterially affecting the reserves of city banks. country Such a change would probable not be desirable because coaatry banks appear already to have relatively lower reserve recuir-2nents, even when allowance is nude for their larger volume of vault cash. This example is cited to indicate that a move which is in itself consistent with a sound reserve principle may nevertheless ..1 Ic - 11 not be desirable, unless it is coupled with a genera :, various differentials now in existence. T'ae I' an adju- tmeis to be n-te , :t should be made all along the line and with reference to the cumulative effect of all the elements of adjustmmt. country are udjusted to uxistin Th cr')dit ind econo.nic structure o4 'the reserve requironients a_id changes in these re- quirements would inevitably- rsult in radjustment and in disturbance to the country's economic life. A revision of uxisting res,rve requirements should, therefore, bu praced:d by reJxa:aination of the problem of res.:rves in its baring not only on banking developments in the Unitd Statis, but also on the relation bet-.)en th, grovth of credit in this country .nd the supply of monetary gold. et TV "). t • PRELIMINARY MEMORANDUM FOR THE OPEN MARKET INVESTMENT COMMITTEE January 7, 1929 The total volume of business in 1928 as compared with 1927, including manufacturing, trade, crop production, building, etc., showed (as nearly as can now be estimated) an increase for the year of approximately 3 per cent. A comparable figure for the growth in the amount of credit in use is less easy to compute because much of the increase in credit did not take the form of bank loans but rather loans made by individuals and corporations, and was reflected in the banking figures in the increased velocity of bank deposits. however, the growth in bank loans and investments from June If, 1927 to June 1928 (to take the mid-points of each year) is increased by the increase in recorded loans for individuals and corporations made on the New York Stock Exchange, there appears to have been a total increase in credit of more than 8 per cent. An equal rate of growth is shown if the figures are taken from December 1927 to December 1928, as nearly as can now be estimated. The computation can be made another way by computing the change in bank deposits multiplied by their velocity (M V of the equation of exchange) which would give an indication of the use of credit. These figures show an increase of about 25 per cent from the last quarter of 1927 to the last quarter of 1928. This compares with a 15 per cent increase in 1927. Thus, the best estimates that we can make indicate that the increase in the use of credit has been quite out of relation to the increase in business. In past years such a lack of relationship has usually been accompanied by changes in prices of different kinds, and often by speculation in commodities or securities. :during the past year, as we know from the segregated reports, much of the increase in crcdit has found its way into loans to brokers on the Stock Exchange. At a number of times during the year there was some evidence that the expansion of credit had been checked. again early in December. VOLUME 187 PAGE 17 This was true in February, in June, and But on each occasion the expansion was again resumed r. • 2 after a brief pause and while the total loans and investments of reporting member banks are only slightly higher than in nay of 1928, nevertheless the total of all credit in use has continued to increase. "Ohile this credit expansion, does not as yet constitute any considerable drain on the country's basic bank reserves since it has not expanded bank deposits by any large amount, it is a potential draiL for the loans made by corporations and individuals, constantly threaten to be converted into bank loans, particularly at times of strain, as was illustrated at the year-end when New York City banks were called upon to put 0581,000,000 in the market in the last five days of the f year, with the consequence that the reserve ratio of the New York bank was reduced to 55 per cent on December 31. So that, quite aside from any dangers that may be incident to the possibility of a deflation in the present level of stock prices the continued growth in credit is at least a potential use of bank raserves at a more rapid rate than could be continued indefinitely especially in the face of actual and possible future losses of gold. The Federal Reserve System thus appears to be facing at the beginning o: the year the same general problem which it has faced during the entire year of 1928; that is, the problem of checking any unnecessary expansion of credit without, if possible, seriously penalizing business. Year End Movement of Funds. The Christmas and year-end requirements for funds called into use a slightly larger additional amount of Federal reserve credit than in preceding years. Total bills and securities in the System were increased from 01,500,000,000 about the middle of November to nearly 31,900,000,000 the last week of the year. In recent years the retirement of Federal reserve credit during January has been a little over 3/100,000,000, and the problem this month appears to be to make sure that the seasonal return flow of currency and credit is applied to a reduction of Federal Reserve credit in use so that it will not be made the basis of any unnecessary expansion of bank credit. • 3 The followirr figures show the chanc:es in Federal reserve credit at reporting dates of January and February in the past two years, taking as a starting point the figures for Ult., 1,,Lst reportirw date of the preceding year. Changes in Supply of Federal Reserve Credit from last reporting date in previous year (In millions of dollars) (Cumulative figures) Government Securities Bills 1927 1928 Total Discounts 1927 1928 1927 1928 1927 1928 1927 1928 12 19 26 11 18 25 - 41 - 42 - 77 + 7 - 17 - 39 - 6 - 4 - 14 - 58 -104 -162 -221 -295 -346 -170 -197 -224 -267 -341 -438 -221 -318 -425 9 16 23 8 15 21 - 76 64 - 99 9 I - 17 - 31 - 33 - 13 - 12 - 5 - 12 -169 .202 -195 -201 -318 -332 -315 -313 -186 -150 -128 -148 -381 -421 -385 -425 -364 -369 -354 -383 29 - 90 - 42 - 6 -195 -276 -116 -373 -354 It will be observed fram these figures that last year the diminution in the bill portfolio during January was smaller and more gradual than in 1927, thus offsetting somewhat the effectiveness of large sales of government securities. Me liquidation of bills will be somewhat diffioult this year because of the nresent relatively low position of bill rates in the market, although recent in. creases of bill rates should aid in securing a normal reduction of bill holdings. If we _assume a normal reduction of ,50,000,000 to 3100,000,000 in hill holdings during Janua7b and a withdrawal of funds through gold earmarking of ,',75,000,000 in the first two weeks of the year there might be expected to be a 3 49 reduction of cbout250,000,000 or 000,000,000 in bills discounted. This would mean a reduction of rediscounts for the System to 0850,000,000 or 3900,000,000 4 during January and February, or about the same amount as was maintained during October and November, a period during which there was a vigorous increase in bank credit, and during which money rates tended to ease somewhat. Already borrowings of New York City banks have been reduced to about 3200,000,000 and further reductions are likely. The two possible methods for maintaining the amount of discounts would be the sale of government securities or an additional liquidation of the bill portfolio beyond what normally takes place. The two possible means of making any given amount of member bank indebtedness more effective in its pressure on the credit situation, if this is regarded as necessary, would appear to be in. creases in discount rates or direct dealing with member banks. In determining what, if any change, in policy, should be adopted, and the methods to be employed to effect it, the three major points for consideration should, of course be I. The effectiveness of such action in controlling unnecessary expansion of credit. 2. The effect of any such action upon domestic business. 3. The effect of such action upon the world monetary situation and indirectly upon world trade. • SECURITY LO BILLIONSo/DOLLAR5 4S 4.5 • , 4 , . A. LOANS TO 3.5 3 _ CUSTOMERS ON STOCKS & BONDS BROKERS LOANS • 2.5 1927 1928 1929 • TOTAL tOANS & INVEITMENT5 BILLIONS of DOLLAR5 1928 1 1 192.7 192,6 1 1925 192.4 •\,,.•_,---........ v , .. „,-.. ...,.......--/,,,.... ..... ---1.1923 Le.4. 441 FEDERAL RESERVE BANK OF BOSTON W. P. G. HARDING GOVERNOP January 22, 1929 • Dear Y.r. Hamlin: In reply to your letter of January 21, I would say that the was ac-!opted at the meeting.of our Directors on June 20 last, which resolution did not refer directly to rediscounts for member banks at any time when the banks had call loans or speculative securities. This resolution referred more directly to continuous borrowings and directed attention particularly to the conditions under which member banks might properly apply for accommodaion. The resolution is as follows: "Resolved that in the judgment of this board of directors, the funds of the Federal Reserve Bank are primarily intended to be used in meeting the seasonal, temporary or unusual requirements of member banks and that continuous borrowing by a member bank as a general practice is inconsistent with the spirit and the intent of the Federal Reserve Act, and with the policy of this bank, and that the Governor be and he hereby is authorized and requested to bring the substance of this resolution to the attention of the officers of any member bank which shows a tendency toward making continuous use of reserve bank credit, with a view of having such continuous use terminated." I may say that the attention of a number of our banks was directed to this resolution, and the responses received have been most gratifying. Sincerely yours,— vernor. Hon. Charles S. Hamlin, Federal Reserve Board, Washington, D. C. AT MOW MEMO i •24 k VOLUME 187 PAGE 56 S t.6050 TO: Feder1 Reserve Boer FRU: Mr. Smead JEnuEry dli, 1929 SUBJECT: Bala Sul,nsions - Year 1926 /it t • CONFIDENTIAL There is given below a summar7 of bank suspensions during the year 1928 with comnarative fiures for the years 1921-1927. The figures shown for 1926 are, of ccurse, preliminary, and while it is not thought that the number of suspensions Till change materially, it is expected f t the deosit fire figures s will be reduced somewhat w final information is recel fhen cl, All ban1.7s Nctional banks Numberl Ca-Atal De-)osits Numberf Capital I Deposits Total:1921-1925 14,996 $158,296,000$1,506,021,000 699 $42,270,000 $327,703,000 1928 453 19,292,000 157,416,000 4,200,000 40,549,00o 57 1927 662 24,76,000 193,691,000 91 5,415,000 46,581,000 1926 956 32,804,000 272,486,000 125 6,020,000 47,566,000 1925 612 24,441,000 172,900,000 118 7,970,000 58,537,000 1924 777 28,373,000 213,444,000 122 7,660,000 60,589 ,000 1923 650 21,978,000 188,505,00o 90 4,610,oco 32,904,000 1922 354 13,743,000 110,721,000 45 3,335,000 19,092,000 1921 502 22,902,000 198,354,000 51 3,060,000 21,285,000 State member anks Nonmember banks Total: 1921-1928 214 15,903,000 119,439,000 4,063 130,123,000 1,060,679,000 1928 16 975,000 11,738,000 410 14,117,000 105,131,000 1927 19,755,000 538 16,729,000 127,555,000 33 2,619,000 1926 2,549,000 20,946,000 796 24,235,000 203,676,000 35 1925 28 1,950,000 8,727,000 466 14,521,000 105,636,000 1924 2,645,000 13,580,000 Si 37 13068,000 138,975,000 1923 34 2,235,000 18,324,000 526 15,133,000 137,577,000 1922 12 621,000 5,151,000 297 9,787,000 86,478,000 1921 19 2,309,000 21,218,000 432 17,533,000 155,651,000 NUMER OF BANK SUSPEITSIOJS BY FEDERAL RESEE.1/1.7 DISTRICTS .42.7D BY STATES Totpl District 1927 1926 1925 19214926 1928 192)4 1923 1922 1921 Boston 16 1 1 2 1 2 6 3 New York 24 2 3 6 4 6 3 PhiladollYnia 16 1 4 2 3 1 2 3 Cleveland 87 17 29 14 6 9 6 1 5 Richmond 56 42 43 377 Si 43 0 44 36 4o Atlanta 494 66 63 162 44 48 23 22 66 Chicago 734 57 124 182 109 103 53 25 46 St. Louis 404 82 56 77 24 53 26 53 33 Minneapolis 1,98 94 142 253 166 295 279 64 73 Kansas City 620 82 100 112 133 77 137 92 57 Dallas 4G0 24 44 50 50 46 51 53 62 San Francisco 226 lo 32 16 24 29 28 31 56 Total 4,996 483 662 956 612 650 777 354 502 States Iowa 494 51 70 135 54 83 35 12 24 North Dakota 334 35 32 37 76 59 106 10 36 South Dakota 381 7 27 115 6)4 111 45 9 3 Minnesota. 3a) 46 55 92 50 45 14 55 13 Texas 289 23 35 30 35 39 21 31 69 Georgia 287 26 16 102 31 29 11 14 56 Missouri 273 31 45 45 43 58 20 11 17 Oklahoma 246 28 21 5 21 49 54 41 27 Kansas 211 26 36 46 19 16 34 20 14 South Carolina 209 22 21 44 43 24 23 18 14 Montana 202 1 2 8 16 46 77 31 21 Nebraska 184 44 25 18 12 17 17 23 26 Florida 127 31 43 35 1 4 3 5 5 Illinois 106 16 29 20 8 1)4 4 lo 5 North Carolina 107 8 14 11 18 13 19 9 15 Indiana 24 91 25 lo 14 7 7 7 7 Colorado 54 4 14 3 15 16 S 13 Arkansas VOLUME 187 63 13 16 19 S 4 5 PAGE 5 70 All other stabs 846 62 126 106 96 104 5312r FEDERAL RESERVE BOARD WASHINGTON Cf? v ADDRESS OFFICIAL CORRESPONDENCE TO THE FEDERAL RESERVE BOARD X-6223 January 26, 192.'. SUBJ:OT: Examination of Member Bank. Dear Sir: ?he Federal ReE'erve Act required that the cost of examinations of member banks made by the Federal reserve banks or the Federal Reserve Board through the Federal reserve agents, be assessed against the member bank examined. within the last two weeks, bills have been introduced in both the Senate and the House of Representatives, which if enacted will amend the law in such a way as to make the charges for member bank examinations discretionary with the Board. U,Don several occasions in the -cast the Bpard has attempted, by circular letter, to define a credit investigation, but after several years experience it has arrived at the conclusion that a far too liberal interpretation has been placed upon credit investigations by the agents. The Board has had this matter under review :or some time and on October 10, passed the following resolutions which deal with the responsibility of the Federal Reserve Board in reference to member banks as it internrets the law: "BE IT RESOLVED, That the Federal Reserve Board recognizes its duty under the Federal Reserve Act to keep itself informed as to the condition of all member banksi, "BE IT FURTHER RESOLVED, That the Board is of the opinion that it is justified in relying upon the Comptroller of the Currency for such information as to National banks; "BE IT FURTHER RESOLVED, That whenever the reports of examination of State member banks furnished by the State authorities are not deemed satisfactory either to the Federal reserve bank of the district concerned or to the Federal Reserve Board, the Federal reserve bank or the Board shall cause to be made at least one examination or investigation each year of .such character as to furnish satisfactory information, the cost of such examinations to be assessed against the member banks examined." VOLUME 187 PAGE 81 • X-6223 -2- In order to avoid duplications and unnecessary expense of operation, which now exist, the Board has voted that the DepartI ment of State Bank Examination, now in operation in the Board's 1929, 1, February effective quarters in Washington, be abolished, and that you be Charged with the duty of seeing to it that the Board's views, as covered in the above resolutions, are carried out in your district. This does not mean that the Board is attemptinA to relieve itself of all responsibility, and you are advised that through its examining force, it will check carefully your hank examination department. The following instructions will serve as a guide to you in performing your duties: 1. The Comptroller of the Currency is a member of the Board and under the law is Charged with the reReserve Federal sponsibility of enforcing the terms of the National Bank Act and also of the Federal Reserve Act. The Board therefore relies upon the Comptroller 4if the Currency to perform his duties and it will not be necessary for the Federal reserve agents to duplicate the work. 2. In the opinion of the Board, State reports of examination can be relied upon in the great majority of cases to furnish the necessary information to the agents. 3. If a State examination is unsatisfactory, a credit investigation will not give sufficient information for the agents to act intelligently upon and a complete examination should be made for which the member bank should be charged. This does not prohibit investigations of member banks by Federal reserve banks or Federal reserve agents without cost, because the Board realizes that unusual situations require unusual action. Therefore, the Board will act promptly by approving or disapproving the request of any Federal reserve bank or any Federal reserve agent for permission to make an investigation without cost. The Federal reserve banks, however, and the Federal reserve agents, in making such request for investigation without cost must bear in mind that if the investigation contemplates anything covered by the following language, which appears in Section 21 of the Federal Reserve Act, the Board cannot waive the cost: "The expense of such examinations shall be borne by the bank examined. Such examinations shall be so conducted as to inform the Federal reserve bank of the condition of its member banks and of the lines of credit which are being extended by them." 4. If Federal reserve agents have evidence in the form of letters or otherwise, that officers and directors of State member X-6223 -3- banks have had their attention called to violations of the law and unsound banking practices by State authorities, it is not necessary for agents to duplicate this work. 5. If this supervision is not conducted by State authorities Federal reserve agents are directed to take such action, as in their opinion, will discharge the responsibilities of the Board. 6. When a State member bank fails to Show any disposition whatever to correct these irregularities within a reasonable time so as to show improvement in its condition, the Federal reserve agent will be expected to lay the information before the directors of his bank and ask them to make a formal recommendation to the Federal Reserve Board, with reasons, as to whether or not the State member bank should continue as a member. 7. Federal reserve agents are instructed to discontinue practice of furnishing the FederEl Reserve Board with present their reports of examination of State member banks, except in extreme cases where they may wish to ask for advice or request the Board to cancel membership. In lieu of these reports, agents will furnish the Board with an analysis of each report received or made by them, using the enclosed analysis form. A supoly of this form is being forwarded under separate cover. The Federal reserve agents are advised that the Board thoroughly realizes that it is utterly impossible to lay down uniform, detailed -procedure in each and every district because of the local conditions which exist in the 48 states. It does believe, however, that certain fundamental policies can be laid down and asks your cooperation toward that end. Yours very truly, R. A. Young, Governor. TO ALL FEDERAL RESERVE AGENTS. C0P Y Dr. Miller's Original draft January 21, 1929. The firming tendencies of the money market, which have been in evid(mce since the opening of the year contrary to the usual trend of money rates at this season, make it incumbent upon the Federal Reserve Syvtem to give const,alt and vigilant attention to the situation in order that no influence adverse to the trade and industry of the country shall be exercised by the trend of money conditions, if it is unavoidable, beyond what may develop as inevitable. Durin,T the year 1928 through the combined influence of member banks and the pldral Reserve banks commercial rates were successfully maintained at levels opreciably lorr than the trend of money market changes about midyear indicated as probable. The problem of exerting the influence of the Federal Reserve system as a moderating influence in the movement of commercial money radles is still with us at the opening of the new year. The extraordinary absorption of funds in speculative security loans which has chracterised the credit movement in the 2ast year or more in the judgment of the Federal Reserve Board deserves --)articular attention lest it become a dcisive factor working toward a still further firming of money r_tes to the !)rejudice of the country's commercial intersts. The resources of the Federal Reserve System are ample fo -• meeting any prObable commercial needs of credit without difficult: or strain providd the credit f.:,cilities of the Federal Reserve System are vigilantly and efficiently administered and restricted to sudh uses as are proper. The Federal Reserve Board has an different occasions and in different places, notably in its annual reports, st:,ted its position Tith regard to VOLUME 187 PAGE 107 uses of the rediscount privilege by member banks for purposes tat are proper. Broadly speaking, the purposes are proper when the credit accommod.Aion obtained from the Federal Reserve bank is for productive and distributive operations. In brief, ;zriculture, industry and trade. They ..re not proper when occasioned by extensions of speculative loans by member banks. Mile such loans are not prohibited either by the National Bank Act or by the Federal Reserve Act, the whole tenor of the Federal Reserve Act mikes it clear that a member bank is not within its reasonable claims for rediscount facilities at a Federal Resrrve bank when the occasion of its borrowing it (a) Sipeculative loans that it contemplates making; or (2) Speculative loans that it has made and which It desires not to liquidate. There would be no difference of opinion as regards the impropriety of seeking Federal Reserve credit for the purpose of making security loans It is the cy)inion of the Federal Reserve Board that the objections that lie against the use of Federal Reserve credit for the making of speculative loans also lie against the use of Federal Reserve credit for the maint,ining of speculative loans. The Federal Reserve Board has no disposition to assuLe authority to interfere with the loan operations of member banks so long as they do not involve the Federal Reserve banks. It has, howovor e a grave re- sponsibility whenever there is evidence that member banks are maintaining a given volume of speculative security loans with the aid of Federal Reserve credit. Then such is the case the Federal Reserve bank becomes either a contributing or a sustaining factor in tho existing volume of securiVloans. And such is contrary to the intent of the Federal Reserve Act and the wholesome operation of the Federal Resrve banking system. It is the opinion of the Fedfq.al Reserve Board that when member banks which have substantial investments of their resources in speculative wcurity loans are called upon by their commercial customers to provide commercial accommodation, the proper course for them to pursue is to reduce their call loans and thus put themselves into a pooition to take care of the requirements of their comercial borrowers. The Federal Reserve Board has no disposition to question the propriety of investments by banks of surolus funds ¶n the call loan market. The call loan market is capable of performing a useful service if investments by banks in it are treated as a secondary reserve to be availed of as occasion arises. It may became a source of mischief, if the banks are permitted to regard such investments as something not to be disturbed except under the pressure of exigent circumstances. Tou are desired to bring this letter to the :Atention of the jirectors of your bank in orier that they may be advised of the attitude of the Federal Res,n.ve Board with respect to a situation and a problem confronting the administration of the Federal Reserve banks which for more than a year has been exciting widespread interest and concern. After your directors h:xe fully considered it the Board desires to be advised of their attitude trid their views on (a) how they keep themselves fully informed as to the occasion of borrowing by their member banks: (b) what methods they euploy to protect their institution ag4inst improper use of its credit facilities by member banks; and (c) what other steps they propose to take in working out a further procedure where existing methods are not proving fully effective. The Board realizes that the problem of adequate control against misuse of the credit facilities of the Federal RefIllrve btalics of the kind that have riven rise to this letter is not free of difficulties. It tlso ag2reciates that no one method of procedure would be equally effective in all :list:riots and in all circumstances. not disposed to be dogmatist in its own atititude. It is, therefore, It is, however, firm in the opinion that a more effective control in meded if the Federal Reserve k/stem is to function satisfactorily and that methods of control suitable to the situation and not invasive of the privacy of member bank operation can be worked out by each Federal Reserve bank that will have the ap.droval imd support of the majority of the member banks of the Federal Reserve System and the general body of public opinion. The Federal Reserve Board will await with deep interest the reply of your directors to this letter and bespeaks their prompt attention in order that ia may have their reply at:nea: date. A. C. Chairman and Board of Directors of each Federal Rw;orve Bank. January 22,4129. c11)- .1.40...# '4" C44,4-4 44.4.4.4.440144 Dr. Miller's Memorandum of January 21, 1929. Suggestions for Chanzes. On Page 1, line 25, substitute for e•Srd oproperu, the phrase "consistent with the terms or spirit of the Federal Reserve Act", and change the following sentence so it will read, "broadly speaking, such consistency exists when the credit accommodation, Line 28. "consistent." Substitute for the word "proper ' , the word Line 28. Substitute for the word "occasionedll the word onecessitated." On Page 2, line 20. Substitute for the word Hinvestmente the words "secondary reserves." Line 21. Substitute for the phrase "something not to be disturbed, etc." the following: "as something not to be used to meet the necessities of agriculture, business, and commerce.n Line 21. as follows: Insert between lines 21 and 22 a new paragraoh 1.444.4442.44-.: "The Federal Reserve Board does not intendt-..by this circular, to advocate any sudden, drastic defl-tien of existing speculative loans. It simply lays down a procedure primarily for the future, with the feeling, however, that a gradual conservative liquidation of present speculative loans may be brought about without injurytre—epeelft44,e—berrewera, thus releasing Federal Reserve credit for normal puxposes. ; "The Board further realizes that the policy herein expressed has, in effect, been carried out in the past by some of the Federal Reserve banks, and, in other Federal Reserve banks, has been attempted with varying degrees of success." •••Imo 4•01111110.1 CD Januaxylik r29. i,4 444. ,( III a-444...4 444.4.4 Dr. Miller's Memorandum Of January 21, 1929, 104W2111-1..§WMIllaag.• To my mind, this whole question involves a determination of what is good banking. There is a great distinction between good banking and doubtful banking, even when the latter is within the limits of the law. I do not believe we can lay down, as a matter of law, that a Federal Reserve Bank can not lawfully discount paper for a member bank, even though the use of the funds is made to make up reserve deficiencies caused, in part, by speculative loans. For example, a bank which is not a regular discounter presents eligible paper to secure funds to make good its reserves which are depleted in part by speculative loans. These loans are lawful for the member bank to make, and the Act provides that the reserves against deposits arising out of these loans must be deposited and maintained in the Federal Reserve Bank, and a penalty is provided if the reserves are not promptly made good when a deficiency occurs. I do not think it can be claimed that, under the Act as a matter of law, we are bound to decline to discount paper to be used for this purpose, for a bank might be in the position where it would have no other means of making good its reserves than the discounting of eligible paper. bank Where a is a continuous borrower, it seems to me that it is really obtaining capital from the Federal Reserve Banks, and this, except in extraordinary crisps, can not be considered good and proper banking. I believe today • • many banks in the United States axe really obtaining capital through rediscounting, and under present conditions this would seem objectionable, whether that capital is used for speculative loans or even for ordinary commercial transactions. As stated above, I believe a bank legally may rediscount commercial paper, although its ultimate use is to replenish reserves depleted by speculative loans, but I further believe that it is the duty of the bank to inquire into the operations of its member banks and to use direct pressure to see that a proper proportion is maintained between its speculative loans and its ordinary commercial loans, especially in the situation which now confronts us where business is threatened by a continuation of the speculative activity now going on throughout the country. MIMNI4=0.=00000......4=0 January 30,029. t4,44 4.4.4.$04.44iso Dr. Miller's Letter. Substitute for the 5th paragraph, the follcwing: °Broadly speaking, borrowing by a member bank fram its Federal Reserve bank is proper When confined REIllarily to productive and distributive operations, in agriculture, industry, or trade.11 to= Substitute for the 6th paragraph, the following: "Tne Federal Reserve Act does not contemplate the frequent or continuous use of the resources of the Federal Reserve banks for the creation or extension of speculative credit. A member bank is not rithin its reasonable claims for rediscount facilities at its Federal Reserve bank 71hen it borrows frequently or 1)41 I either for the purpose of making speculative loans, or for the purpose of maintaining such loans,“ (For example, - -if a member bank which is not a frequent or continuoas borrower, presents eligible paper for rediscount in order to replenish a deficiency in its reserves caused, in part, by Toeculative loans, it surely would not be contended that the Federal Reserve bank should refuse such discount., LETTER SUB:tr2TED BY R. MILLER JANUARY 29th, AS SUBSTITUTE FOR LETTER APPROVED JANUARY 24th. The firming tendencies of the money mrket ahich have been in evidence since the beginning of the year - contrary to the usual trend of money rates at this season - =eke it incumbent upon the Federal reserve benks to give constent and close attention to the situation in order that no influence adverse to the trade and industry of the country shall be exercised by the trend of money conditions, beyond what may develop as inevitable. The extraordinary absorption of funs in speculative security loans which has characterized the credit movement during the past year or more in the judgment of the Federal Reserve Board deserves particular attention lest it becocrel a decisive factor working toward a still further firming of money rates to the prejudice of the country's commercial interests. The resources of the Federal Reserve System are ample for meeting the groeth of the country's commercial needs for credit, provided they are competently administered and protected against seepage into uses not contemplated by the Federal Reserve Act. The Federal Reservo Board has on different occasions, notably in its Annual Reports, stated its position with regard to the use of the rediscount privilege by member banks for purposes that come within the intent of the Federal Reserve Act and, therefor,re to be regarded as proper. Broadly speaking, borrowing by a member bank from its Federal reserve bank is proper when the credit accommodation sought and obtained is for productive and distributive operations - in agriculture, industry or trade. The Federal Reserve Act does not, however, contemplate the use of the resources of the Federal reserve banks for the creation or extension of speculative credit. A member bank is not within its reasonable claims for rediscount facilities at its Federal reserve bank when it borrows , either for the purpose of making speculative loans or for the purpose of meintaining speculative loans. The Federal Reserve Board has no dispesition to assume authority to interfere with the loan practices of member banks so long as they do not involve the Federal reserve banks. It has, however, a grave responsibility whenever there is evidence that member benks are maintaining speculative security loans with the aid of Federal reserve credit. When such is the case the Federal reserve bank becomes either a contributing or a sustaining factor in the current volume of speculative security credit. This is not in harmony with the intent of the Federal Reserve Act nor is it conducive to the wholesome operation of the banking and credit system of the country. -2- You are desired t) bring tqis letter to the attention of the directors of your bank in order that they may be advised of the attitude of the Federal Reserve Board with respect to a situation and a problem confronting the administration of the Federal reserve banks, which for more than a year has been exciting widespread interest and concern. The Board realizes that tae problem of adequate control agains t misuse of the credit facilities of the Federel reserve banks of tne kind that have given rise to this letter is not free of administr, tive difficulties. It views t-a matter primarily -a one of good operating practice. It also appreciates that no one '41ethod of nroced ure would be equally efiective in all districts and in all circum stances. It is, therefore, not disposed to be dogmatic in its own attitu de. It is, however, of the opinion that, taking the Federal reserve banks as a whole, the problem has not yet been completely met and that the situation admits of improvement. It is also of the pinion that methods of handling the problem suitable to the situation and not invasi ve of the privacy of member bank operation can •be worked out by each Federal reserve bank that will have the approval and support of the majority of the member banks of the ederal Reserve System and the general body of public opinion. The Federal Reserve Board will await with deep interest the reply of your directors to this letter and bespeaks their prompt attention in order that it may nave their reply at an early date. By direction of the Federal Reserve Board. Very truly yours, Vialter L. Eddy, Secretary. Chairman and Board of Arectors of each Federal Reserve Bank. LETTER SUBYITTED Br DR. MILLSR JANUARY 29th, AS SUBSTITUTE FOR LETTER AP2ROVED JANUARY 24th. (Suggestions for amendment by C. S. Hamlin and E. H. Cunningham) L444%4464414( ii4.4-41 444,4444, 4.440. .......«•44t( 4.4/4" , *446444 064.444 The firming tendencies of the money market which have been in evidence since the beginning of the year - contrary to the usual trend of money rates at this season - make it incumbent upon the Federal Reserve banks to give constant and close attention to the situation in order that no influence adverse to the trade and industry of the country shall be exercised by the trend of money conditions, beyond that may develop as inevitable. The extraordinary absorption of funds in speculative security loans which has characterized the credit movement during the past year or more in the judgment of the Federal Reserve Board deserves narticular attention lest it become a decisive factor working toward a still further firming of money rates to the prejudice of the country's commercial interests. The resources of the Federal Reserve System are amnle for meeting the growth of the country's commercial needs for credit, provided they are competently administered and protected against seepage into uses not contemplated by the Federal Reserve Act. 7 The Federal Reserve Board has on afferent occasions, notably in its Annual Reports, stated its position with regard to the use of the rediscount privilege by member banks for purposes that come within the intent of the Federal Reserve Act and, therefore, are to be regarded as proper. Broadly speaking, borrowing by a member bank from its Federal Reserve bank is proper when the credit accommodation sought and obtained is for (productive and distributive operations - in agriculture, industry or trade. (Mr. Hamlin) (Broadly speaking, borrowing by a member bank from its Federal Reserve bank is proper when confined primarily to productive and distributive operations, in agriculture, industry, or trade.) The Federal Reserve Act does not, however, contemplate the use of the resources of the Federal Reserve banks for the creation or extension of speculative credit. A member bank is not within its reasonable claims for rediscount facilities at its Federal Reserve bank when it borrows either for the purpose of making speculative loans or for the purpose of maintaining speculative loans. (Mr. Hamlin) (The Federal Reserve Act does not contemplate the frequent or continuous use of the resources of the Federal Reserve banks for the creation or extension of speculative credits • A member bank is not within its reasonable claims for rediscount facilities at its Federal Reserve bank when it borrows frequently or continuously either for the purpose of making speculative loans, or for the purnose of maintaining such loans.) The Federal Reserve Board has no disposition to assume authority to interfere with the loan practices of member banks so long as they do not involve the Federal Reserve banks. It has, however, a grave responsibility whenever there is evidence that member banks are maintaining speculative security loans with the aid of Federal Reserve credit. When such is the case the Federal Reserve bank becomes either a contributing or a sustaining factor in the current volume of speculative security credit. This is not in harmony with the intent of the Federal Reserve Act nor is it conducive to the wholesome operation of the banking and credit system of the country. You are desired to bring this letter to the attention of the directors of your bank in order that they may be advised of the attitude of the Federal Reserve Board with respect to a situation ald a Problem confronting the administration of the Federal Reserve banks, Aftich for more than a year has been exciting widespread interest and concern. (You are desired to bring this letter to the attention of the directors of your bank in order that they may be advised of the attitude of the Federal Reserve Board with respect to this situation and problem confronting the administration (Mr. Cunningham) of the Federal Reserve banks, and the Board would like to have from them an expression of (a) how they keep themselves fully informed of the use made of borrowing by their member banks, (b) what methods they employ to protect their institution against the improper use of its credit facilities by member banks, ani (c) how effective their policy has been.) The Board realizes that the problem of adequate control against misuse of the credit facilities of the Federal Reserve banks of the kind that have given rise to this letter is not free of administrative difficulties. It views the matter primarily as one of good operating practice. It also appreciates that no one method of procedure would be equally effective in all districts and in all circumstances. It is, therefore, not dis-oosed to be dogmatic in its own attitude. It is, however, of the opinion that, taking the Federal Reserve banks as a whole, the problem has not yet been completely met and that the situation admits of improvement. It is also of the opinion that methods of handling the problem suitable to the situation and not invasive of the privacy of member bank operation can be worked out by each Federal Reserve bank that willhave the approval and support of the majority of the member banks of the Federal Reserve System and the general body of public ooinion. -3- (It should be understood that the Federal Resrve Board is not suggesting or advocating any sudden, drastic liquidation of existing speculative loans. On the contrary, it is simply laying down a procedure primarily for the future, with the feeling and hope, however, that a gradual conservative liquiclation of present speculative loans (Mr. Hamlin) may be brought about or may. occur naturally without injuxy, thus releasing Foderal Reserve credit for business and agricultural purposes. The Federal Reserve 'Board will await with deep interest the reply of your directors to this letter and bespeaks their prampt attention in order that it may have their reply at an early date. By direction of the Federal Reserve Board, Very truly yours, Walter L. EddYs Secretary. Chairman and Board of Directors of each Federal Reserve Bank. 7 • Form No. 131 .14.4,j1.4 Office Correspon ence To Mr. Hamlin FEDERAL RESERVE BOARD • Date_ January 311 1929._ Subject:_ Fmn Mr. McClelland 0 4.41.40044-444 /64.4444.. There is auoted below the amendment to the letter under consideration by the Board which Mr. Cunningham submitted yesterday: "You are desired to bring this letter to the attention of the directors of your bank in order that they mav be advised of the attitude of the Federal Reserve Board with respect to this situation and problem confronting the administration of the Federal Reserve Banks, and the Board would like to have from them an expression of (a) how they keep themselves fully informed of the use made of borrowing by their member banks, (b) what methods they employ to protect their institution against the improper use of its credit facilities by member banks, and (c) how effective their policy has been." 2-8495 /40.4.4.44 114,44,444.4„ 14-14.44.44 )4,4ap February 2, 1929. Dear er. Curtiss: The firming tendencies ef the money eerket which have been in evidence since the beginnine of the yeer - contrary to the umell trend at tide seeson - make it incumbent upon the Federal reserve banks to give constent and close attention to the situation in order that no influence adverse to the trade and industry of the country shall be exercised by the trend of money conditions, beyond what may develop as inevitable. The extraordinary absorption of funds in speculative security loans which ha characterized the credit movement during the past year or more,in the judgment of the Federal Reserve Board, deserves erticular attention lest it become e decisive factor working toward a still further firming of money rates to the prejudice of the country's conreercia1 interests. The resources of tee Federal Reserve jystem ere ample for meetine the growth of the country's commercial needs for credit, provided they are competently alministered and protected ageinst seepage into uses not contemplated by the Federal heserve Act. Tne 7edera1 Reserve ect does not, in tee opinion of the Federel Reserve Board, contemplate the use of the resources of the Federal reserve banks for the creation or extension of seeculative credit. A mteber bank is not within its reasonable claims for rediscount facilities et its Federal reserve bank when it borrows either for the purpose of making speculative loans or for the purpose of maintaining speculative loans. The Board has no disposition to assume auteority to interfere with the loan practices of member banks so long as they do not involve the Federal reserve banks. It has, however, a grave reseonsibility whenever there is evidence that member banks are maintain. ing speculative security loans with the aid of Federal reserve credit. Then such is the case the Federal reserve bank becomes either a contributing or a eastainine factor in the current voluee of speculative secUtity credit. This is not in harmony with the intent of tee Federal deserve Act nor is it conducive to the wholesome operation of tee banking anl credit system of the country. K.,1 You are desired to brine: tete letter to the attention of the diroctoes of your bank In order thtt they mny be advised of the attituqe of tee Federal Reserve Board with respect to this situation end the problem confronting the administration of Federal Reserve banks. The 3ord would like to nave from tnem an ex:Jressien es to (a) how they keep teeeeeleoes fully informed of the use made of borrlwingsby their euleber bfnKs, (b) whet uothoL t Ley eerploy t) Trotoct their institution against the iloroper use )f it credit facilities by member banks, and (c) how effective teese mete;ls have been. The Board realizes tee t tee problem of protecting the credit situatien from strain because of excessive abs)rption ef credit in specul-tive security loans is attenied with life ficulties. It also realizes that there are elements in the situetion which are not re dily amenable to reco6nized meteeds of benking control. the Board nevert:eless eslieves that, however difficult, the preblem on be more completely met and tnat the existing situation admits of improvement. The Federal Reserve Bonrd awaits t'3e reply of your directors to this letter and bespeaks their proert attention in order that it may have their rely at an early -Jae. By direction of the Federal iteserve Board. Very truly yours, ocraelland, Assistant Jecretary. Mr. Freda ic 7. urtiss, Chairman, Federal serve Boston, :arachu etts. C? C ONFILENTIAL Not for publication EARNINGS AND EXPENSES OF FEDERAL RES1HVE BANKS, DECEMBER 1928. Month Federal Reserve Ba-ik Et ma .2:7v York :h ladeiphia Jieveland of Earnings from Discounted bills Parchased bills $276,947 1,252,368 393,000 464,506 $187,854 580,217 62,605 208,464 174,456 248,636 762,770 168,114 102,970 119,413 161,739 43,298 Richmond Atlanta i cago St. Louis rI7- SAA- U. S. securities December •••• Current expenses Other sources Total Exclusive of cost of F.R.currency Total $27,150 292,041 68,420 104,860 $8,736 121,812 14,306 24,577 $500,687 2,246,438 538,331 802,407 $158,977 511,903 154,896 220,034 $160,576 555,616 156,844 222,980 10,191 17,695 132,057 74,903 10,878 12,791 56,110 7,087 298,495 398,535 1,112,676 293,402 116,205 115,932 299,755 117,152 117,363 117,382 304,116 117,925 1928 January - December. 1928 Current net Available for earnings Current Dividends reserves, Ratio to net accrued surplus and Amount paid-in earnings franchise capital tax.* Per cent $340,111 39.5 $2,595,339 $590,830 $1,863,961 1,690,822 39.9 12,038,777 2,7143,725 8,885,563 381,487 31.0 843,755 3,408,304 2,438,244 579,427 47.4 3,653,739 856,843 2,667,203 181,132 281,153 808,560 175,477 Minneapolis 42,139 81,762 39,476 15,940 179,317 91,490 92,212 Kansas City 87,105 172,539 19,436 34,628 6,443 233,0 46 122, 431 123, 632 109, %pallas 414 69,692 98,366 47,540 25,859 241,457 111,849 112, 143 S:n Francisco 129, 314 230,633 204,303 14,213 55,257 504,406 195,162 197,564 306,842 TCL Dec. 1928 4,255,800 1,870,427 904,218 318,752 7,349,19 7 2,215,786 2,278,353 5,070,844 7. 1928 3,615,684 1,759,800 793,790 131,336 6,300,610 2,181,348 2,222 ,864 4,077,746 c. 1927 1,569,894 1,026,405 1,686,625 242,8 19 4,525,747 2,121,307 2,267,966 2,257,781 Jan.-Dec. 1928 38,334,141 13,0 20,535 10,827,702:4870,482 64,052,860 26,098,910 26,904,810 37,148,050 1927 17,010,778 9,206 ,675114,206,1722,600,859 43,024,484 25,673,603 27,518,443 _15,506,041 FEDERAL RESERVE BOARD DIVISION OF BANK OPERATIONS FEBRUARY 6, 1929. C. VOLUME 187 , PAGE 120 st. 6089 35.0 63.5 51.7 38.3 1,455,256 370,683 977,428 2,325,022 312,259 1,941,146 5,239,759 1,099,761 ... 3,880,660 1,565,431 321,855 / 799,954 34.2 30.6 35.3 33.3 709,830 935,988 874,187 2,346,738 181,203 253,254 258,544 625,751 486,989 574,815 497,636 1,595,976 40.8 34.0 20.1 26.4 37,148,050 8,458,463 26,609,575 12.0 15,506,041 7,754,538 7,113,387 *After adjustment for current profit and loss entries, purchases of furniture and equipment, etc. COPY Fc0tRAL RXSIBTIC JAW OF BOSTON February 6, 1929. PFXSOBAL AND cogrummu TO TH3 WIV1M11 i&U ADDRgSSND: The financial situation in this district is such that we feel we are justified in discussing it frankly with you and to request your cooperation in averting the development of conditions which might be serious. For several months past, taking the district as a whole, there has been a decline in the volume of deposits in member banks, and during the year 1928 savings deposits in New England showed a decline for the first time in many years, due probably to investments made by depozitors. An analysis made of the statements of our member banks shows that several of than who are borrowing from the Federal reserve bank have outstanding call loans which, if paid or reduced, would avert the necessity of their borrowing from DA, and in many cases their loans to customers on collateral have increased very materially during the past year and are, from information received in certain specific cases, still increasing. Ordinarily loans and advances by this bank to member banks reach a high point daring the month of December due to a seasonal demand, and these advances are liquidated during the month of January. In 1927, our loans to member banks reached their high point on December 15 $42, 104,000, and by January 27, 1928, this amount was reduced to $19,511,000, In 1928, our loans and advances to member banks reached their high point on December 26, the amount being nearly 92 million dollars. By January 9, 1929, this amount had been reduced to approximately 47 million dollars, and up to February 2, there was a steady increase until on that date our total loans and advances to member banks stood at $83,366,000, being distributed among 169 borrowing banks as compared with $34,680,000 on February 2, 1928 to 95 bans. Luring this period, our advances to member banks showed an increase in the City of Boston, in Massachasttts outside of Boston and in each of the other five states in the district. The =MIA of our Federal reserve notes outstanding, however, has decreased from $167,759,000 on December 24, 1928 to $132,831,000 rease usually noted at this season on February 4. This represents the of the year and indicates that the demand upon us has not been caused by currency requirements. Just now we are between seasons, agricultural oneratione have not begun, textile and other industries are not heavy buyeIo of material for the time being, and the increase in our loans to manber banks at a time *len ordimrily they are well liquidated, indicates that the demand upon us is occasioned either by a decline in denosits, loans in the call money market, or by collateral loans to customers. VOLUME 187 PAGE 131 As you know, Boston is an important accepts'se market both as to the creation and distribution of bills. It ranks next to New York in this respect. Because of the fact that maw dealers have offices both in Ism York and Boston, we are oompelled in the matter of our bill purchases to follow the Federal Reserve Belk of New York very closely both as to policy and as to rates. rartly beemese of the attitude of other Federal reserve tanks with respect to bills and Tmrtly becanstJ of our large advances to member banks, we have recently been obliged t restrict our purchases of bills although we continee to do what we can to protect the local acceptance market in a lbgitimate way by riving preference to short term bills and to bills created in this district. On Friday, January 11, our bill portfolio reached its high mark, $76,432,000, but booms' of our restriction of rurchases, the amount of bills we are now carrying in our portfolio has been reduced to about 58 million dollars. Locking back for many years past, we fiat that there has always been, a seasonal demand onus from member banks about the first of March and we see no reason why we should not antici pate such a demi& this year. At wish to put ourselves in position to meet all legitimate demands Whet they are made won us and the object of this letter is to request all of our present or prosnective borrowers to assist us as far as PosciAe in building up a strong reerve before the ST)ring demand arises. It is rather mortifying to the officers and directors of the Federal Reserve Bank of Boston and we are sure that it is also to our member banks, that this Federal reserve bank should have the lowest reserve of aey of the twelve banks in the System, especially at a time when we knew that such a condition is notasased by commercial, agricultural or industrial activities. A few days ago our reserve percentage was under 5214 sithowth we are glad to say that there lias been a considerable lanimremment since the low point was reachet. *e feel, however, that we are justified in bringing to you: attention the matters touched upon in this letter lest there should be a renewal of the nmseasonable demand upon us. Our situation in this district has attracted the attention of the Federal Reserve Board which has addressed a letter to us , er eligible for rediscalling attention to the fact that the only pa count at a Federal reclerve bank is paper the proceeds ofwhich have been used or are to be used for commercial, agricultural or industria3, purposes, and thet it is the view of the Board that member banks Should not use their elid.ble paper in order to obtain funds for call loans or for loans on collateral, for under the terms of the Pe4erdl Reserve Act, loans mi-dc for the purpose of carrying investments are not eligilbe for rediscount at a Federal reserve bank. *e aprreciate the fact that it is very difficult for a bank to decline to make a collateral loan to a good customer, and we are not asking that you release to Asko ouch loe, nor do we ask that tilos.= on calls be called by banks which are only occa, atonal and tem,orary borrowers from us, but those banks Which have beeu borrowers from us for weeks or months at a time =detach have call loans outstAndine should reduce them for the purpose of liquidating their indebto. -3edness to us; and we urge the banks to do what they can, as far as they feel that they can do so without Drejwaice to their busine,14, to discourage their customers in the matter of collateral loans in order to relieve the prevsure uron the Federal reserve bank. This letter is not written with any view _f dictating to a member bank how it should ecnduct its credit policy, but rather to bring the situation to the attention of the banks and to invite their cooperation in carrying out what we believe to be a sound nolicy. It will be remembered that conditions in January 1920 were such that the Federal reserve banks, with the approval of the Federal Reserve Board, were odor. pelled to adopt a very drastic policy and we are sure that we are all anxious to avert the necessity of adopting such a policy at the rresent time. This letter is not being sent to all of our member • banks and we are sure that you realize the imovrtance of treating it as confidential. Very truly yours, (S) W. P. G. Earding, Governor. • • Aik q' 1 -0 ONFIDENTIAL For use of Federal Reserve Board only DISCOUNTED BILLS HELD BY EACH .bEDERAL RESERVE BANK AND TOTAL BILLS AND SECURITIES HELD BY THE SYSTEM (In millions of dollars) St. 3438 System St. Total U. S. Boston N.Y. Phila. Cleve. Rich.lAtla. Chicago Louis Minn. K.C. Dallas S.Fran. Discount- Purchas- securi- bills and ed bills ed bills ties securitiesit 1 Daily average holdings 1928 January 23 153 44 51 *27 Aiii 29 *59 17 4 13 4 41 465 512 1,350 373 *45 *119 VIIF February *53 51 27 *28 51 *24 *4 *11 *4 *52 471 406 360 1,237 March 49 130 49 *57 28 25 68 26 3 11 4 63 415 513 1,272 343 *44 Apl'il 211 53 61 *35 39 *88 *33 *10 19 8 61 SGil 351 1,371 356 May 60 *295 *6o *68 43 *52 110 39 11 23 *9 64 836 349 257 1,442 June 85 376 80 89 48 6o 136 *22 11 *49 1,019 244 53 232 1,495 9 July *68 *383 *94 101 *55 *68 *157 *J5 12 24 17 57 1,090 185 213 1,488 Aut;ust 61 321 99 *80 57 77 159 59 18 23 30 77 1,o61 178 210 1,449 September 51 352 106 78 57 83 114 65 18 24 30 87 1,064 226 1,534 240 October 46 300 94 75 48 79 134 18 50 31 25 74 368 237 1,584 975 November 51 238 79 86 42 69J 139 44 16 43 21 70 471 238 1,610 897 December 65 . 299 91 108 41 5F 4o lo 44 179 18 Go 483 1,013 263 1,766 1929 January Holdings on Feb. 6 6o 246 73 go 41 59 . 143 37 12 33 21 55 859 473 229 . 1,570 62 195 70 81 39 59 39 13 37 23 82 852 411 200 1,472 151 *Discount rate changed. 'it-Includes "other securities". VOLUME 187 PAGE 137 FEDERAL RESERVE BOARD, DIVISION OF BANK OPERATIONS.
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