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BOARD DF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Mr. Coe
July 31, 1941
Subject:.
To____ The..Files .
From
Date
1
After correspondence -with Mrs. Hamlin (see letters of May25 and June l+> 1941) the items attached hereto and listed below,
because of their possible confidential character, were taken from
Volume 195 of Mr. Hamlin's scrap book and placed in the Board's
files:
VOLUME 195
Page 31 - Memoranda re Discount Rates. (Notes from diary giving
Board action.)
Page 32 - Direct Pressure - data on.
Page 37 - Memo to Mr. Hamlin from Mr. Goldenweiser attaching tables
showing the factors in Federal Reserve position for January 1922
to January 1929.
Page 38 - Suggested amendment to Mr. Wyatt's Regulation - Section II.
Page 39 — Memo to Mr. Hamlin from Mr. Smead covering brokers' loans,
call rates, etc.
Page 41 - Minutes of conference of Board and Governors - April 4 , I9 2 9 .
Page 43 - Data concerning lowering of discount rates. (Notes from
diary giving Board action.)
Page 45 - Memo to Gov. Young from Gov. Harrison concerning change in
discount rate.
Page 47 - Memo to Mr. Hamlin from E. H. Cunningham re Substitute Reso
lution purporting to amend Section 13 of the Federal Reserve Act.
Page 48 - Memo to Mr. Hamlin from Mr. Goldenweiser re Federal Reserve
policy.
Page 49 - Letter to Mr. Platt from Gov. Harrison seeking increase in
discount rate.
Pages 50 & 51 - Letter to Board from Chairman Cannon of F.R.Bk. of
Philadelphia re Federal Reserve credit. Also analysis of letter.
Page 52 - Memo to Mr. Hamlin from Mr. Smead re Resources of each
F.R. Bank as of April 24, 1929.
Page.
Memo re Federal Reserve Credit - Reasons given by F.R.Bk.
of N.Y. for desiring to raise discount rate.
Page 55 - Letter to Board from F.R. Bank of Atlanta re banking de
velopments .
Page 57 - Letter to Board from F.R. Bk. of Chicago re use of F.R. Banks'
credit by member banks.
Page 58 - Letter to Federal Advisory Council re situation of money
market.
Page 59 - Letter to Board from F.R.Bk. of St. Louis re use of Federal
Reserve credit by member banks.
Page 61 - Letter to Board from F.R.Bk. of Boston re use of Federal
Reserve credit by member banks.
Page 62 - Letter to Board from F.R.Bk. of Richmond subject same as above.
53,
~
#
#
-2 -
Page 63 - Letter to Board from F.R.Bk. of N.Y. — same as above.
Page 6 k - Letter from Mr. McGarrah re increasing discount rates.
Page 65 - Letter from Mr. Heath on use of F.R. Bank credit.
Page 66 - Letter to Board from F.R. Bank of San Francisco— same as above.
Page 67 - Analysis of letter to Board from Mr. McGarrah— same as above.
Page 69 - Analysis of letter to Board from F.R.Bk. of Atlanta— same
as above.
Page 71 - Reply (Proposed) to letter of Chairman McGarrah by C.S. Hamlin.
Page 73 - Letter to Board from F.R.Bk. of Cleveland— same subject as above.
Page Ik - Letter to Board from F.R.Bk. of Cleveland re resolution
adopted by its Board of Directors.
Page 75 - Proposed letter to F.R.Bk. of N.Y. re cooperation of member
banks.
Page 76 - Letter to Board from F.R.Bk. of Boston re use of Federal Re
serve credit by member banks.
Page 77 - Letter to Board from F.R.Bk. of Philadelphia re use of Federal
Reserve credit by member banks.
Page 78 - Letter tp Gov. Norris of F.R.Bk. of Philadelphia from The
Philadelphia Company defending position of member banks.
Page 80 - Letter to Board from F.R.Bk. of Philadelphia re reductions in
borrowings of member banks.
Page 81 - Questions re member bank borrowing for F.R.Bk. of New York.
Page 83 - Memo re reduction in Federal Reserve rate from present rate
before expected agricultural and business demand arises.
Page 84 - Letter to Board from F.R.Bk. of Atlanta concerning use of
credit by member banks.
Page 85 - Letter to Board from Chairman McGarrah of New York expressing
view that Federal Reserve Board policy of seeking control of credit
without increase in the discount rate has created much uncertainty
throughout the country.
Page 86 - Statement prepared and submitted by Mr. Chas. E. Mitchell
during meeting with F.R. Board on June 5, 1929.
Page 87 - Copy of a letter from F.R.Bk. of San Francisco to Board of
Directors of said Bank presenting letter from Board calling atten
tion particularly to four banks that were and had been steady
borrowers —
Page 88 - Draft of memo by C. S. Hamlin re finning policy of Federal Re
serve System.
Page 89 - Points for consideration in connection with basis of Federal
Reserve credit policy in the near future, and particularly in con
nection with the handling of crop-moving credit requirements in
the autumn. (Memo of Mr. Miller)
Page 91 - Confidential memo by C.S. Hamlin re Federal Reserve policy.
Page 92 - Letter to Gov. Young from Gov. Harrison of F.R.Bk. of N.Y.
re handling present and prospective credit problems.
Page 93 - Copy of letter to Chairman McGarrah from Gov. Young re
Federal Reserve program for handling credit situation.
Page 9ft - Memoranda re Regulation to prevent improper use of Federal
Reserve credit.
Page 113 - (X-6370) Report of Committee on Redemption of Canadian
Currency.
#
-3Page 122 - Memo from Mr. Parry to Mr. Platt re article in Boston
Globe.
Page 113 - Memo to Board from Mr. Smead re Member banks in debt to
F.R. Bank 80 per cent or more of the time during the quarter
ending June 1929.
Page 119 - Memo to Gov. Young from Mr. Goldenweiser re effect of
Security purchases.
Page 151 - Memo to Board from Mr. Wyatt re Legislation re Chain
Banking.
#
January 11, 1928:
Returning from New York, Miller opposed increase of discount
rates a.t New York to control speculation, and favored continuing the
sale of Government securities.
Vol. 14, p. 170
January 28, 1928:
Favors an increase in rates to control speculation, as sales
of Government securities were 'being made timorously and were exercising
no control over the situation,
Vol. 14, p. 115.
January 24, 1928:
to 4jj$.
The Board voted to approve increase in Chicago rate from 3|-$
Cunningham voted No.
Vol. 14, pp. 115, 116, 117
January 26, 1928;
•
Cunningham files his reasons for voting No. He said Chicago
had advanced no reason for the increase except to curb stock speculation,
and claimed that by approving the increase the Board had, in effect,
recorded itself as favoring control of stock speculation through rate
increase.
Vol. 14, p. 118.
January 26, 1928:
Board approves Richmond increase in discount rates.
except Cunningham, who voted No
Vol. 14, pp. 120, 121.
All voted Aye
February 3, 1928:
New York increases discount rate to 4$.
Vol. 14, p. 123.
March 7, 1928:
Governor Young tells the Senate that the recent increase in
discount rates was caused by gold movements and not for the purpose of
restraining speculation.
Vol. 14, p. 135.
March 7,1928:
C.S.H. and Cunningham did not approve the recent rate increase
for any ourpose of restraining stock speculation.
Vol. 14, pp. 135, 136, 137.
VOLUME 195
PAGE 31
#
-2 -
March 26, 1928:
Board gives Open Market Committee authority to continue sales
of securities, and to work for firmer money conditions, hut added that
this did not mean an increase in discount rates. Miller voted Ho; all the
rest Aye.
Vol. 14, pp. 139, 140.
March 26, 1928?
Miller filed a memorandum. Said he favored doing nothing, as
further sales wo’old necessarily bring about an increase in discount rates.
Vol. 14, pp. 139, 140.
April 18, 1928:
Boston applies for authority to increase discount rates.
Curtins and Governor Harding both said the proceeds of rediscounts were
being used for speculative loans. At first a motion to approve is lost
by a tie vote. Platt and C.S.H. Aye. Miller and Janes Ho. Secretary l.Iellon
then came in.
Miller said Hew York pressure was satisfactory, and that he
should never vote to control stock speculation through increase in discount
rates. C.S.H. reminded Miller that in the fall of 1925 he earnestly
favored an increase in the Hew York rate to control speculation, although
Hew York said it had the situation well in hand through direct pressure;
that Dr. Miller even voted for the Cunningham motion to initiate a 4jo rate
at Hew York over the heads of its directors. After lunch, Miller said he
had talked with Governor Case and he said the situation in Hew York was
getting out of hand; that money was pouring into Hew York for speculative
purposes and that he could identify 50 millions as coming from Boston.
Miller then said that he felt impelled, in view of what (Governor Case
had just told him, to change his vote of the morning and to vote to aporove.
The vote stood: - Secretary Mellon, Platt, C.S.H. and Miller Aye. James Ho.
Vol. 14, pp. 152, 153.
April 19, 1928:
Aye
Board approves increase in discount rate at Chicago.
except James. Cunningham absent.
Vol. 14, pp. 154, 155.
April: 20, 1928:
Board voted to approve increase at St. Louis.
Vol. 14, p. 155.
All vote
April 23, 1928:
Eoard. voted to approve increase in Richmond rates. James
voted Aye with the majority, because Richmond had ordered sold all its
holdings of Government securities.
Vol. 14, p. 155.
May 1, 1928:
Miller tells the Governors at the Conference that open market
operations in Government securities should he done away with, and that
discount rates should he used to control speculative credit.
Vol. 14, p. 159, 170.
July
10, 1928:
Board approves Chicago’s increase of rate,
and James voted No.
Vol. 14, p. 191.
The Comptroller
July 12, 1928:
New York increases to 5^>.
Reynolds only voted against it.
Vol. 14, pp. 192, 194. '
July 18, 1928:
At session with Open Market Committee Board agreed unanimously
that the
rate at New York should he maintained. Miller said that we had
lost 500 millions of gold hut had the situation in hand through the
discount rate of 5$.
Vol. 14, p. 192, 193, 194.
July 18, 1928:
Board approves Boston increase to 5^.
Vol. 14, p. 194.
July
18, 1928:
Miller said the Board had a wonderful opportunity in view of
tne gold exports to regulate credit through discount rates, and to drop
(as we have heen doing since Jan. 1927) open market operations.
Vol. 14, p.194.
#
DIRECT PRESSURE
Glass favored, during war
September 7, 1927.
Vol. 14, p. 32.
C.S.H. favors, to discourage speculation.
September 27, 1927. Vol. 14,
p. 17
Miller favors increase in discount rates, as direct pressure is not
controlling the situation.
January 23, 1923.
Vol. 14, p. 15
James said direct pressure at Hew York was succeeding, and was driving
borrowers from New York to Boston.
April 17, 1928.
Vol. 14, p. 151.
Hiller says open market operations are working well in New York.
r ,
, April 18, 1928.
Vol. 14, p. 152
Hiller demands that Governor Case use direct pressure on the New York banks.
Vol. 14, p. 159
May 1, 1928
Miller at meeting of directors of Federal Reserve Bank, New York, strongly
objects to direct pressure.
Vol. 14, p. 180
June 9, 1928
Harrison says direct pressure should be continued at New York.
July 7, 1928.
Vol. 14, p. 190.
Miller explains above attitude. Is still opposed to direct pressure.
July 18, 1928.
Vol. 14, p. 193
James attacks Governor Case for not using direct pressure.
July 18, 1928.
Vol. 14, p. 192
VOLUME 195
PAGE 32
1
Office Correspondence
FEDERAL RESERVE
BOARD
Date__ February 18, 1929 .
Subject:
To
Mr. Hamlin
From .
Mr. Goldenweiser
(f l.t-7-J
I
transmit herewith a set of tables showing the factors
in Federal reserve position for January, 1922 to January, 1929.
For each year beginning with 1922 I show changes for the pre
ceding twelve months.
I am also showing changes for the entire
period, for the last year, for the five years, 1922-1927, and for
the three special periods mentioned in my memorandum of December
19, 1928 and in yours of January 14, 1929.
The figures in the tables differ in minor amounts from those
in my memorandum, chiefly as a result of revisions; the difference is
in no case substantial.
I
wish to apologize for the delay in transmitting this material,
but we have been short-handed owing to sickness and pressure of other
work.
The statistical work involved in the preparation of this
material has been considerable.
VOLUME 195
PAGE 37
RESERVE BANK CREDIT AND FACTORS IN CHANGES l/
(In millions of dollars)
January, 1922
Reserve bank credit outstanding
Bills discounted for member banks
Bills bought
U. S. securities
Other securities
All other reserve bank credit
Net Treasury credit
Monetary gold stock
Total
1,505
(1,106)
C 126)
C 234)
C 39)
1,553
_3,663j
6,721
Money in circulation
Member bank reserve balances
Nonmember clearing balances
Unexpended capital funds
Total
4,665
1,741
27
286L
6,721
C 0)
ALL MEMBER BANKS 2/
20,884
14,433
6,451
23,482
17,394
6,088
Net demand plus time deposits
Net demand deposits
Time deposits
Total loans and investments
Total loans
Investments
BROKERS 1 L0AJ3S (OLD SERIES)
945
547
398
Loans on securities to brokers and dealers, total 3/
For own account
For account of correspondents
ing
Weekly averages of daily figures for the
■ yeecr •
j Cf'L l
week inolud/the
Call date figures for December 31,-of pievioins
Figures for first Wednesday in tho yeatn J
year.
W-
RESERVE BANK CREDIT AND FACTORS IN CHANGES l/
(In millions of dollars)
January, 1923
Reserve bank credit outstanding
Bills discounted for member banks
Bills bought
TJ. S, securities
Other securities
All other reserve bank credit
Net Treasury credit
Monetary gold stock
Total
Money in circulation
Member bank reserve balances
Nonmember clearing balances
Unexpended capital funds
Total
ALL MEMBER BANKS
Change from
January, 1922
1,396
(596)
(256)
(455)
( 0)
l 89.)
1,727
3,932
TToKT
- 109
510)
(+ 130)
(+ 221)
c
o)
(+ 50)
+ 174
+ 269
+ 334
4,798
1,923
58
276
+ 133
+ 182
+ 31
- 12
+ 334
(-
Z/
Net demand plus time deposits
Net demand deposits
Time deposits
Total loans and investments
Total *loans
Investments
23,832
16,187
7,645
25,579
17,930
7,649
+
+
+
+
+
+
2,948
1,754
1,194
2,097
536
1,561
1,589
938
652
+
+
+
644
391
254
BROKERS* LOANS (OLD SERIES)
Loans on securities to brokers and dealers,
total 3/
For own account
For account of correspondents
ing
L/ Weekly averages of daily figures for the week includ/the fir s t of the year
TT/ Call date figures fo r December 31 of previous year,
zj Figures fo r fir s t Wednesday in the year.
Jhd
1924
RESERVE BARK CREDIT AND FACTORS IN CHANGES l/
(In millions of dollars)
January, 1924
Change from
January, 1923
(+
(+
CC
C+
+
143
133)
92)
333)
0)
35 ;
30
31&,
Reserve bank credit outstanding
Bills discounted for member banks
Bills bought
U. S, securities
Other securities
All other reserve bank credit
Net Treasury credit
Monetary gold stock
Total
1,253
(729)
(.348)
(122)
C 0)
(54)
1,757
4 f245_
7,255
Money in circulation
Member bank reserve balances
Nonmember clearing balances
Unexpended capital funds
Total
5,018
1,932
26
279
7,255
+ 220
+
9
- 32
+
3
+ Z 60
25,007
16,356
8,651
26,487
18,842
7,645
+ 1,175
+
169
+ 1,006
+
908
+
912
4
ALL MEMBER BANKS
Net demand plus time deposits
Net demand deposits
Time deposits
Total loans and investments
Total loans
Investments
"+~200
Z/
5ERIES)
BROKERS* LOANS (OLD SERIES)
Loans on securities to brokers and dealers,
total z /
For own account
For account of correspondents
1,333
712
620
-
256
226
32
ing
Weekly averages of daily figures for the week includ/the f ir s t of the year.
y
Call date figures for December 31 of previous year,
■§/ Figures for fir s t Wednesday in the year.
l/
JM1.
1925
RESERVE BANK CREDIT AND FACTORS IN CHANGES j/
(In millions of dollars)
January, 1925
1,328
C341)
(380)
(548)
Reserve bank credit outstanding
Bills discounted for member banks
Bills bought
U. S. securities
Other securities
All other reserve bank credit
Net Treasury credit
Monetary gold stock
Total
C
0)
(59)
1,759
_4.498
7,585
5,073
2,214
39
259
7,585
Money in circulation
Member bank reserve balances
Nonmember clearing balances
Unexpended capital funds
Total
ALL MEMBER BANKS
Net demand plus time deposits
Net demand deposits
Time deposits
Total loans and investments
Total loans
Investments
Change from
January, 1924
+
75
(- 388)
32;
(+
(+ 426)
0)
(
5l)
L+
+
2
+ 253
+ 330
+
+
+
+
55
282
13
20
330
2/
28,251
18,446
9,805
28, 746
19,933
8,813
+
+
+
+
+
+
3,244
2,090
1,154
2,259
1,091
1,168
+
+
+
648
429
218
BROKERS' LOANS (OLD SERIES)
Loans on securities to brokers and dealers,
total 3/
For own account
For account of correspondents
1,981
1,142
838
ing
l/ Weekly averages of daily figures for the week inolud/the first of the year.
'z/
Call date figures for December 31 of previous year.
3/ Figures for first Wednesday in the year.
J /W .
1926
RESERVE BANK CREDIT AND FACTORS IN CHANGES l/
(In millions of dollars)
January, 1926
Reserve bank credit outstanding
Bills discounted for member banks
Bills bought
U. S. securities
Other securities
All other reserve bank credit
Net Treasury credit
Monetary gold stock
Total
1,541
(712)
(_370)
(374;
Cll)
(.74)
1,758
4,398
7,697
Money in circulation
Member bank reserve balances
Nonmember clearing balances
Unexpended capital funds
Total
5,139
2,249
35
7,697
Change from
January, 1925
+
(+
C-
C-
213
371)
10)
ej
+
11 )
15)
1
100
112
+
+
+
+
66
35
4
15
112
L+
L+
ALL MEMBER BANKS 2/
Net demand plus time deposits
Net demand deposits
Time deposits
Total loans and investments
Total loans
Investments
29,891
19,238
10,653
30,884
21,996
8,888
+ 1,640
+
792
+
848
+ 2,138
+ 2,063
+
75
BROKERS* LOANS (OLD SERIES)
Loans on securities to brokers and dealers,
total 3/
For own account
For account of correspondents
2,908
1,285
1,622
+
+
+
927
143
784
BROKERS’ L O M S (NEW SERIES )
Loans on securities to brokers and dealers,
total 3/
For own account
For account of out-of-town banks
For account of others
3,141
1,338
1,239
564
ing
1/ Weekly averages of daily figures for the week inolud/the first of the year.
■?/ Can date figures for December 31 of previous year.
Figures for first Wednesday in the year.
1927
J
RESERVE BANK CREDIT AND FACTORS IN CHANGES 1
(In millions of dollars)
January 1927
Change from
January 1926
- 59
(+ 7)
(+ is;
Reserve bank credit outstanding
Bills discounted for member banks
Bills bought
U. S. securities
Other securities
All other reserve bank credit
Net Treasury credit
Monetary gold stock
Total
1,482
i 719)
(.383)
(.317)
( 3)
1,746
4,488
7.718
4 90
+ 21
Money in circulation
Member bank reserve balances
Nonmember clearing balances
Unexpended capital funds
Total
5,141
2,231
50
296
7.718
4
+
4
4
AIL MEMBER BANKS
C 60j
6- 57;
(r
(r
8)
14)
- 10
2
18
15
22
21
Zj
Net demand plus time deposits
Net demand deposits
Time deposits
Total loans and investments
Total loans
Investments
30,342
18,902
11,440
31,642
22,652
8,990
4451
-336
4 787
4758
4656
4102
2,819
1,037
1,049
732
-322
-301
-190
4168
BROKERS* LOANS (NEW SERIES)
Loans on securities to brokers and dealers,
total 3/
For own account
For account of out -of-town banks
For account of others
1J Weekly averages of daily figures for v/eek including the first of the
year.
Zj Call date figures fo r December 31 of previous year.
3J Figures for fir s t Wednesday in the year.
1928
RESERVE BANK CREDIT AND FACTORS IN CHANGES
l/
January, 1928
Change from
January,, 1927
+
111
174)
4;
286j
Reserve bank credit outstanding
Bills discounted for member banks
Bills bought
U. S. securities
Other securities
All other reserve bank credit
Net Treasury credit
Monetary gold stock
Total
1,593
(545)
(387)
(603)
C 1)
C57J
1,776
4,377
7,746
Money in circulation
Member bank reserve balances
Nonmember clearing balances
Unexpended capital funds
Total
4,951
2,466
30
299
7/746
+
+
190
235
20
3
28
32,848
20,083
12,765
34,247
23,886
10,361
+
+
+
+
+
+
2,506
1,181
1,325
2,605
1,234
1,371
+
+
+
+
991
474
322
196
fr
£
t(+
—
+"
-
2)
V
28
111
28
ALL MEMBER BANKS 2/
Net demand plus time deposits
Net demand deposits
Time deposits
Total loans and investments
Total loans
Investments
BROKERS* LOANS (NEW SERIES)
Loans on securities to brokers and dealers,
total z /
For own account
For account of out-of-town banks
For account of others
3,810
1,511
1,371
928
Weekly averages of daily figures for the week including the fir s t of the year.
Call date figures for December 31 of previous year.
Figures for fir s t Wednesday in the year.
JMt.
1229
KE3EH7E BANK CREDIT AKD FACTORS HT CHANGES
(In millions of dollars)
ij
January 1929
1,832
(1,048)
C 491)
(239)
C 10)
(44)
1,785
4.126
7,743
Reserve hank; credit outstanding
Bills discounted for member hanks
Bills bought
U. S. securities
Other securities
All other reserve hank credit
Het Treasury credit
Monetary gold stock
Total
+ 239
503)
(+ 104)
(- 364)
(+ ’9)
(- 19
+
9
- 251
3
C+
— 19
_ 37
+
2
+ 51
— 3
4,932
2,429
32
_35&
7,743
Money in circulation
Member hank reserve balances
nonmember clearing balances
Unexpended capital funds
Total
ALL MEMBER BARKS
Change from
January 1928
zj
Ret demand plus time deposits
Ret demand deposits
Time deposits
Total loans and investments
Total loans
Investments
3 X3l7
/%
IHt
t
-
I\
‘t S M
4-
3
M
% 3, I S S
io, t i l
+
v
fit
I}?
try
ij*0?
w
BROKERS1 LOANS (NKV SERIES)
Loans on securities to brokers and dealers,
total 3J
For own account
For account of out-of-town banks
For account of others
5,350
1,516
1,648
2,166
+ 1520
+
5
+ 277
+1238
Weekly averages of daily figures for week including the first of the
year.
Zj Call date figures fo r December 31 of previous year.
Zj Figures for fir s t Wednesday in the year.
l/
January,
1922
Reserve bank credit outstanding
Bills discounted for member banks
Bills bought
TJ# S. securities
Other securities
All other reserve bank credit
Net Treasury credit
Monetary gold stock
Total .
Money in circulation
Member bank reserve balances
Nonmember clearing balsnces
Unexpended capital funds
Total
January,
1928
Change
1,505
(1,106)
C 126)
(234)
( 0)
C 39)
1,553
3,663
6,721
1,593
(545)
(387)
(603)
t 1)
(57)
1,776
4.377
7,746
+
88
560)
(261)
(+
369.)
(+
(+
1)
I V
(+
+
223
+
714
+ 1,025
4,665
1,741
27
288
6,721
4,951
2,466
30
299
7,746
+
286
+
725
+
3
+
11
+ 1,025
ALL MEMBER BANKS £ /
20,884
14,433
6,451
23,482
17,394
6,088
•7
BROKERS* LOANS (JTT^iT firPTWf)
Net demand plus time deposits
Net demand deposits
Time deposits
Total loans and investments
Total loans
Investments
Loans on securities to brokers and dealers,
total 3/
For"”own account
For account of out-of-town banks
For account of others
OL D SEIU&
945
547
398
32,848
20,083
12,765
34,247
23,886
10,361
+ 11,964
+ 5,650
+ 6,314
+ 10,765
+ 6,492
+ 4,273
n t * s e a its
+
3,810
+
1,511
(1,371\ 2 2 9?
V 928/ > '
2,865
964
1,90 1
V
Weekly averages of daily figures for the week including the first of the
year,
2( Call date figures for December 31 of previous year,
3/ Figures for first Wednesday in the year.
RESERVE BARK CREDIT AND FACTORS IN CHANGES 1/
(In millions of dollars)
January
January
1922
1929
Reserve "bank credit outstanding
Bills discounted for member banks
Bills bought
U. S. securities
Other securities
All other reserve bank credit
Net Treasury credit
Monetary gold stock
Total
Money in circulation
Msnber bank reserve balances
Nonmember clearing balances
Unexpended capital funds
Total
1,505
(1,106)
( 126)
( 234)
(
0)
( 39)
1,553
3,663
6, 721
1,832
(1,048)
i4
91)
( 239)
t io)
C 44)
1,785
4,126
7,743
4,665
1,741
27
288
6,721
4,932
2,429
32
350
7,743
Change
+ 327
58)
365)
(+ 5 )
10)
(*
5)
+ 232
+ 463 .
+1022
(r
C+
c*
ALL MEMBER BARKS 2j
20,884
14,433
6,451
23,482
17,394
6,088
Net demand plus time deposits
Net demand deposits
Time deposits
Total loans and investments
Total loans
Investments
BROKERS* LOANS
'kv SNTiiEJC!)
0LP j
Qlf<-
Loans on securities to brokers and dealers,
total 3j
For own account
For account of out-of-town baiiksV
For account of others
J
^
*
p
+ ll.S I-i
3
11
i
r S/SU
iS3
yf , 6 ? i
isf
t o, s i i
t
^
/ VMt /
/ LKA*j u> f
/ sJ I a
e
am
s
ypw
H
t
n . H U
nevse-Hies
+ %} V 5
S, 3 5 a
lj
S U
♦
,
+
1
fl,< W A A 4 svu j ( 4 2 7 -
'
Oil
r i' Ui
1J Weekly averages of daily figures for week including the first of the
year.
2J Call date figures for December 31 of previous year.
3J Figures for first Wednesday in the year.
i
7,
\ill
RESERVE BARK CREDIT AND FACTORS DT CHARGES
(In millions of dollars)
Reserve hark credit outstanding
Bills discounted for member hanks
Bills bought
U. S. securities
Other securities
All other reserve hank credit
Ret Treasury credit
Monetary gold stock
Total
Ret demand plus time deposits
Ret demand deposits
Time deposits
Total loans and investments
Total loans
Investments
4,951
2,466
30
299
7,746
4,932
2,429
32
350
7,743
+
+
-
n; m
■t S 'ti
- m
C
Money in circulation
Menber hank reserve balances
Ronmember clearing balances
Unexpended capital funds
Total
ALL MEMBER BARKS
(57)
1,776
4,377
7,746
January
1929
1,832
(1,048-)
C 4911
(239-)
C 10-)
C44P
1,785
4.126
7,743
January
1928
1,593
(.545)
(.387-)
(603)
Change
+
(+
(+
(-
239
503j
104)
364)
(+
9)
(- 131
+
9
- 251
3
19
37
2
51
3
Zj
32,848
20,083
12,765
34,247
23,886
10,361
O, fjj
)S.t>n
IS9
X*J
I o, s n
+
h
i
<»y
BROKERS* LQAHS (HEW SERIES)
Loans on securities to brokers and dealers,
total 3J
For own account
For account of out-of-town banks
For account of others
1
3,810
1,511
1,371
928
5,330
1,516
1,648
2,166
Weekly averages of daily figures for week including the first of the
year.
Zj C a l l date f ig u r e s f o r December 31 of p re v io u s y e a r .
3J f i g u r e s f o r f i r s t W ednesday in the y e a r .
J
+1520
+
5
+ 277
+1238
m
m
RESERVE BANK CREDIT AND FACTORS IN CHANGES
(Annual averages.
In millions of dollars)
1922
1927
Change
Reserve bank credit outstanding
Bills discounted for member banks
Bills bought
U. S. securities
Other securities
All other reserve bank credit
Net Treasury credit
Monetary gold st ock
Total
1,228
(574)
(159)
(454)
0
( 41J
1,602
3,802
6,632
1,174
(442)
(263)
(417;
0
(521
1,774
4,564
7,512
- 54
(-1321
(+1041
(- 37;
0
(+ I D
+172
+762
+880
Money in circulation
Member bank reserve balances
Nonmember clearing balances
Unexpended capital funds
Total
4,536
1,781
30
285
^67632*
4,892
2,290
31
_2S9
7,512
+356
+509
+ 1
+ 14_
+88CT
...................................
RESERVE 5 M K CREDIT AMD FACTORS IN CHANGES
(Monthly averages of daily figures. In millions of dollars)
February,
1922
Reserve bank credit outstanding
Bills discounted for monber banks
Eills bought
U. S. securities
Other securities
A.11 other reserve bank credit
Net Treasury credit
Monetary gold stock
Total
Money in circulation
Member bank reserve balances
Nonir.ember clearing balances
Unexpended capital funds
Total
1,234
(773 .)
( 87)
(355;
t 0)
(20)
1,521
3,701
6,459
4,451
#1,689
34
285
6,459
June,
1922
1,192
(439)
a 35)
(5931
c 01
(25;
1,600
3,776
6,568
4,429
1,820
34
285
~^868
Change
42
335)
((+ 48}
c+ 238}
0)
c
t*- 5)
+ 79,
+ 72,
+ 109
22
+ 131
0
0
+ 109
RESERVE BANK CREDIT AND FACTORS IN CHANGES
(Monthly averages of daily figures.
In millions of dollars)
April,
1924
December,
1924
Reserve bank credit outstanding
Bills discounted for member banks
Bills bought
U. S, securities
Other securities
All other reserve bank credit
Net Treasury credit
Monetary gold stock
Total
981^
(49EJ
(174)
(272;
( 0>
(40)
1,720
4,383
7 .0 5 T
1,288
(302)
(357)
(555)
l 2)
(.72?
1,767
4,507
7,562
Money in circulation
Member bank reserve balances
Nonmember clearing balances
Unexpended capital funds
Total
4,886
1,905
23
270
7,084
5,088
2,182
32
260.
7,562
iy
;{*?***
Change
+
(c+
(.+
307
193)
183)
283)
(+
(+
+
+
+
32)
47
124
478
+
+
+
+
2>
202
277
9
478
RESERVE BARK CREDIT AMD PACT OHS IE CHARGES
(Monthly averages of daily figures)
In millions of dollars
February
1927
1,043
(393)
( 304)
(,30?)
December
1927
Change
1,568
( 529 )
+ 525
0 136)
(+ 74}
(+ 299)
1)
cO
I V
+ 39
ML 160
Reserve bank credit outstanding
Bills discounted for member banks
Bills bought
U. S. securities
Other securities
All other reserve bank credit
Eet Treasury credit
Monetary gold stock
Total
(37)
1,757
4,576
7.376
61)
(54)
1,796
4*416
7.780
Money in circulation
Member bank reserve balances
ITonmember clearing balances
Unexpended capital funds
~ Total
4,843
2,212
26
295
7.376
5,048
2,399
27
306
7.780
CZ)
( 378?
(606)
+ 404
+ 205
+ 187
+
1
+ II
+ 404
Suggested .Amendment to Mr* Wyatt's Regulation, - Section II:
Except with the permission of the Federal Reserve Board, no Federal
Reserve Bank shall discount, or rediscount, any note, draft, etc. etc.,
from any member bank vjhich, at the time, has outstanding such an amount of
speculative security loans as, in the judgment of the Federal Reserve Bank,
is interfering or is threatening to interfere with its ability to furnish
credit facilities at reasonable rates to its agricultural or coranercial
\
*
borrowers.
Provided, however, such restriction shall not apply to notes, etc.
offered for rediscount, etc. where the note, etc. is accompanied by a
statement in writing, duly sworn to by the maker, of the purpose for which
the loan is desired; that the borrower is not a security broker as defined
in this regulation; that the proceeds are not to be, and will not be, used
for the purpose of purchasing, etc. stocks, bonds, or other investment
securites except United States notes and bonds; that the proceeds will not
be paid or loaned to aiy security broker, etc. etc.; that the proceeds of
such loan are to be used for no other purpose than the following:
fully).
(State
#
Provided further that the member bank offering the paper shall certify
that it duly made an investigation before granting the loan, and that it is
satisfied that the statements of the maker are correct.
VOLUME 195
PAGE 38
FEDERAL RESERVE
BOARD
Date_April 3 >--1929
To.___
Mr. Hamlin
Subject:
Mr. Smead
Last Saturday you asked me to give you a memorandum covering brokers '
loans, call rates, etc., during the last week of March.
On Monday morning, March 25, call money renewed at 9 per cent for the
fourth consecutive time. As funds were only in fair supply at the opening and
demands soon became rather heavy because of the calling of loans, the rate for
new loans was advanced to 10 per cent around mid-day, an hour later to 12 per
cent, and shortly thereafter to lU per cent, the highest rate since July 1, 1920.
At the close of the day the Standard Statistics average of stock prices was 5.6
points below the previous (Saturday) closing. During the day street loans made
by 37 New York City reporting banks increased by $7,000,000 or to $1,131,000,000,
while loans for out-of-town banks declined $ 16 ,000,000 and for account of others
$6 ,000 ,000 , with the result that total brokers’ loans for the day were down
$ 1 5 ,000 ,000 .
On the morning of Tuesday, March 26, call money renewed at 12 percent,
the highest renewal rate since the turn of the year. Shortly after noon the new
loan rate was advanced to 15 per cent, ana. an hour later to 17 per cent without
attracting a sufficient volume of funds. At 1:55
t*19 new T°an rate was
advanced to 20 per cent and this rate seemed to be sufficient to induce offerings
large enough to satisfy the demand. The 20 per cent call loan rate was the highest
since February 5 , 1920. Security prices dropped sharply early in the day, but
there was a substantial rebound before the closing and the final Standard Statis
tics average was down only 1 .2 points for the day. While it is apparent that the
shortage of funds in the market was cured by the 20 per cent call rate, never
theless the brokers’ loans made by the 37 New York daily reporting banks declined
by $38,000,000, the decline in loans for own account being $3U,000,000 and for
out-of-town banks $2 1 ,000 ,000 , while loans for the account of others increased
$1 6 ,000 ,000 .
On the morning of Wednesday, March 27, the demand for new call loans wss
almost as large as the previous day and the renewal rate was fixed at 15 per cent,
the highest renewal rate since February 6, 1920, and both new and renewal loans
were held at that rate all day. Stock prices opened with moderate gains and then
declined, but subsequently trices advanced sharply and at the close the Standard
Statistics average was up 5«^ points for the day. Total brokers' loans declined
$199,000,000 further, the decline for the New York banks’ own account being
$9,000,000, for out-of-town banks $20,000,000 and for the account of others
$80,000,000.
On Thursday, March 28, the last day on which the Stock Fxchange was open
during the week, call money again renewed at 15 per cent, but as offerings were
in excess of a smaller demand than had prevailed for some days past, the new loan
rate was successively reduced to 12, 10, and then 8 per cent, and in the outside
market loans were placed at 6 per cent, and a rather large amount was left unlent
at the close of the day. Owing to the easy money conditions security prices con
tinued their rise and at the close were 3 -5 points above the close of the previous
day.
While complete figures are not available at this time, such figures aP
VOLUME 195
PAGE 39
have indicate that call loans made "by the principal New York City hanks for their
own account declined hy about $17,000,000 on Thursday.
On Tuesday, March 26, the Standard Statistics average for 90 stocks
was 193.U or 1^.1 points below the high for the year, reached on March l6 , while
on March 23, or 2 days later, they had rebounded to 202.7 or only U .8 points
below the year's peak. Notwithstanding the high call rates and the urgent demand
for money the total brokers1 loans made by the 37 daily reporting banks declined
from $ 5 ,841,000,000 on Saturday, March 23, to $5,678,000,000 on Wednesday, March
27.
The following table summarizes the figures of brokers' loans and borrow
ings of New York City member banks, also average stock prices, the call money
renewal rate, and the number of shares of stock sold on each day from Saturday,
March 23 to Thursday, March 28:
Mar, 23
Mar. 25 Mar. 26
Mar. 27 Mar 28
(Amounts in millions of dollars)
Brokers' loans of 37 banks*:
Total
For own account
For out-of-town banks
For others
Borrowings from F.
R.Bank
Standard Statistics average
price of 90 stocks
Call loan renewal rate
Number of shares sold
5.gI+l
5,826
5.787
5.678
1 ,12 ^
1,736
2,980
1 ,1 3 1
1 ,72 1
2 ,97 ^
1,097
1,700
2,990
1,088
1,680
2 ,9 10
5 .6 3 7
1,091
1,680
2,866
178
213
200
220
189
200 .
19 U .6
193>
199.2
202.7
9
12 i
15 i
5,860
8,2^7
5.619
15 i
5,096
♦The figures for these banks differ slightly from those for the 33 member
banks included in the Federal Reserve Board's weekly statement.
We have obtained from the Federal Reserve Bank of New York a statement
showing call loans for own account (not including time loans) made by all the
princinal New York City banks and their borrowings from the Federal Reserve Bank
for each day from March 19 to March 3 0 . A copy of this statement is attached.
You will note from the statement that on Tuesday, March 26, on the afternoon of
which Mr. Mitchell gave out the statement regarding his bank's attitude toward the
market, the call loans of the National Citv bank for its own account increased
$6,000,000 to $150,000,000, following an increase of $6,000,000 on Monday, while
its borrowings declined $1,000,000 to $2^,000,000. On the next day, Wednesday,
the call loans of his bank declined $9 ,000,000 to $1 ^1 ,000 ,0 0 0 , while its borrowings
increased $11,000,000 to $35,000,000. On Thursday there was a further decline
♦♦Complete figures recently received show that total brokers' loans
for own account increased $3 ,000 ,000 .
♦
- 3 -
of $6,000,000 in the National City Bank's call loans and at the same time the
bank liquidated its entire borrowings of $35,000,000 and did not borrow again during
the remainder of the week.
Just what factors caused the sharp upward turn
in the market on
Tuesday is difficult to say, but I understand that when the market was at the
bottom with no new purcha.se orders coming in, J. F„ Morgan and Company placed very
substantial orders for purchases and that this was really the main factor in the
market's recovery. No doubt the Chicago situation was partly responsible for the
sharp decline in prices. 'Then the large Chicago banks forced a reduction in their
I security loans this made it necessary for the local brokers to borrow from some
1 other source, and I understand that they did borrow from numerous sources,
incllading a number of large industrial concerns that brought back to Chicago money
they had on deposit or were lending in New York. In other words, part of the
J load carried by certain of the Chicago balks was shifted to other lenders/
(
Borrowings of member banks in New York City, which averaged about
$197,000,000 for the week ending March 30, as compared with $135,000,000 the week
before and $176,000,000 during the two weeks ending March 13, were no doubt
influenced by the preparation for month-end and quarterly settlements, as also
was the supply of funds available for loan on call.
cQ vnv*m ii
s?A*rores? $801183
BOWiOtJ*OS Of K l TOBJf CITY BMFS AT m w m * L BTSSHTF BAIff ASD CALL 1QABS ^OU OfR ACCQOH?
AS
7HI CLO- OF BUSI ES DAILY vaHC - IQ TO 30. 19?9
kfcwl *(/
(In M illions o f d o lla r * ) _________________ U C f o l u M
Tuesday
. 3^12—
Bank: o f A f r i c a , H.A.
Debt
Call loans
Ban* o f the ‘/anhattan Company
Debt
C e ll loans
fnk o f Mew Toxic t Trust Coamany
Debt
C all loans
Bankers Trust Coanany
Debt
Call loans
Contrail Cfcion Trust Coarcany
Debt
C all loans
Ch»se National B~nk
UU
15
Bebt
C a ll loans
ChathaaH&beoix Nat’ l Bk ,1 Tr. Co.
Debt
C all loans
Chemical National Bank
Debt
C all loans
Corn £*change Bank
Dsbt
C all loans
Tqui table Trust Cotsnany
.
Debt
Call loans
Faroj«rs Loan * Trust Company
.
Debt
Call loans
F ir s t National-Bank
.
Dsbt
.
C « ll loans
is
-7•»•
Wednesday
Thrusday Friday
JhrZZ...
ui
Ul
9
9
9
9
13
7
*7
12
IS
36
39
35
62
67
23
6
z}
5
37
5
29
31
10
16
32
6
ii
3
9
15
31
55
■ ;;y'•*’Vv^-v■-
Ui
Saturday
Monday jTuesday
_JL=23L.. JbgSOJhak
Ul
15
30
*3
uu
5
7
k
1?
20
Us
12
16
UU
37
37
S
66
15
76
22
6
20
31
6
30
S
17
6
Thursday
Friday
Saturday
.-3 = a —
.1=29—
-lr3P—
36
U
6
11
13
11
1?
12
15
U?
6
3«
6
29
39
8
65
21
5
21
3**
6
31
8
15
3
16
lb
6
- >■ >*:‘ ‘ ‘i/*.*
l?
56
adnesdey
— 1=27,.-
3
11
30
•
31
. ' :• *
20
13
13
13
17
- 2 I ^U98d$i?
Wednesday Thrueday| f riiAv
1-20 J l
Saturday|
%
Monday (Tuesday
- ? 2
Suaranty Trust Corsuany
•
Debt
Call lonna
Hanover Wattonal Bank
Debt
O i l loans
• ping Trust Company
Debt
C all loans
kanufecturers Trust Ooareny
Debt
C all los»ns
Fetional Bunk of Commerce
• Debt
C all loans
la tto n a l City B*nk
Deb t
' .?;v . Oil 1 loans
National Park Bank
Debt
C all loans
Few York fro st Company
►
' l l lo ns
eabosrd National Bank
Debt
.
C ell loans
U. 3. Mortgage A Trust Company
Debt
\
Call loans
A ll other Hew York C ity banks*
Debt
'
<
Cfcll loans
.
.
-
TOTAL - Tebt
Call loans
MO
37
20
99
3
91
21
?3
10U
67
10
12
5?
k
?6
7
27
25
138
«»
5
2
139
7
9
7
6
m
9
6
11
6
"
7 .
19
lk
15
16
lk
13*
?**
21
90
88
92
99
• 33
.
R
/
■n
T
••Aw ^
101
«•* | i '.f
<20
56
28
138
135
135
If
, 15
.
S’ Ji,
2 m
6
21
905
21
A;
137
20
102
S6l
22
lk
21
20
86
2H
U6
60
!& t
>*>7
90
15
53
k$
♦
39
v%t»m
J—1-21__L '—
15
16
15
1 2
;.* 3
10
20
2C
lk
19
3?
92
39
9U
189
169
876
918
193
9*»9
lk
22
90
#Call loan figu res not included for some of the smaller Few York City b*?nks which do not
retort to us.
10
vA -
-f
«
1929.
CONFERENCE OF BOARD JTO GOVERNORS
A pril 4 . 1929.
The Governors, among other things, reported against a d iffe r e n tia l
on member bank c o lla te r a l notes, but believed that i f any d iffe r e n tia l
should be contemplated i t should be postponed u n til commercial rates could
be reduced.
The Governors reported on Mr. James1
bank deposits not over 10 # o f th eir to ta l
non—reserve c i t i e s , that in th eir opinion
individual banks in the c it ie s and not to
proposition that banks having
demand deposits should be made
the 10 # should be applied to
the entire c i t y .
Discussion of credit and rate situ a tio n .
Governor Calkins reported as a formula that the Governors unanimously
subscribe to the opinion that no Federal Reserve bank should today have v
le s s than a 5# ra te , and that rates should be advanced to 6# in the Federal
Reserve banks in p rin cip al fin a n c ia l centers.
Governor McDougal said that the Governors were not sneaking fo r th eir
d ir e c to rs.
Governor Hardings
Hew England is a saving and loan section , and an investment section .
He stated that the Hew England banks have lo s t heavily in d ep osits, as
a lso the savings banks; that the reserve deposits o f the member banks had
dropped 140 m illio n s, while a l l banks had dropped 250 m illio n s ; that the
member banks loan la rg e ly on c o lla te r a l loans which, in f a c t , were not
liq u id , that on January 26th the Boston bank had the lowest reserve ratio
of the System; that ju st before the Board1s warning he had sent out a
confid ential le t t e r to 60 banks in h is D is t r ic t ;t h a t la t e r ,a f t e r the Board
had published the recommendation o f the Federal Advisory Council, he sent
out a general le t t e r ; that the response to h is f i r s t l e t t e r was very
encouraging, advances to member banks dropping from 83 to 53 m illio n s ; that
the b i l l rate advances had k ille d the b i l l market in Hew England; that
the recent improvement in h is reserve s was brought about by the cutting
down o f b i l l s ; that although the reaction at f i r s t was good in h is D is t r ic t ,
on some days the discounts are as high as ever, and he i s s a tis fie d that
d irect action , although i t has done much, w ill not be a solution of the
problem unless a ssiste d by higher discount r a te s.
VOLUME 195
PAGE 41
2.
He said that some banks were buying acceptances and rediscounting
them at the discount rate of 5# , mentioning the Old Colony Trust Company,
which had so discounted 5 m illio n s, not fo r any stock speculation purpose.
He also cited the instance of the Falmouth Bank which bought acceptances
at 5 -3 /8 # and discounted them with h is bank at 5 #.
As to the e ffe c t o f an increased discount rate on small borrowers,
he said that in the country d is t r ic t s the borrowers always pay about the
same rate In the c it ie s where borrowers can go to other d is t r ic t s ,
they get a low rate not related so much to the Federal Reserve rate as
to the security or c a ll loan rate.
He said that an advance to 6$ would p o ssib ly increase the small customers’
rates from 5^ to 6#, but not higher. He said that h is suggestion made to
the Board some time ago o f a d iffe r e n tia l rate against c o lla te r a l notes, was
strongly objected to by h is Class A D irectors. He said that 70# of h is
loans are c o lla te r a l notes secured by Government bonds.
On the b asis o f the present 5# rate, he would lik e a rate o f
on
b ills .
He said i t would not be possible to obtain any greater cooperation
with the member banks than he is gettin g at the present time; that they
s t i l l are making c o lla te r a l lo a n s; that a 6# rate would help them r e s is t
th e ir customers and bring about a reduction in these loan s. He agreed that
the real menace i s sp eailative cre d it, and that 6# may not clean up the
situ ation but may be the forerunner o f successive advances.
He again expressed the opinion that direct action , although i t has done
much, can not cure the problem except with the help o f a 6# discount rate,
o .S ,H . asked him about the statement in Mr. Curtiss* recent report
that there is some commodity speculation in shoes and cotton. He did not
seem to attach any importance to th is , and said that his recommendation
is not based on any ex istin g commodity speculation.
To Dr, M ille r he stated that the question was the control o f c o lla te r a l
loans; that the member banks,although they have somewhat controlled them by
d irect action , can not refuse them, but that a higher discount rate would
make i t easier fo r them to control them. He thought that the increased
rate would not a ffe c t general business in h is D is t r ic t .
3.
Governor Harrison:
States that in 1927 the System, rig h tly or wrongly, started an
easy money p o lic y ; that gold imports were imminent, and that we were
forced eith er to lower our discount ra te s, or to see Europe increase hers;
that a European increase would seriou sly a ffe c t our export trade; that
business at the time here was under depression, and i t was f e l t that lower
rates would help both the domestic and international situ a tio n ; that
lowering the rate did greatly help our exports, and i t must be admitted
also encouraged speculation.
States that at the end o f 1927 a large gold export movement started
in ; that the Federal Reserve rates were increased three tim es, the p olicy
a t that time being to r e s tr ic t an undue expansion o f Federal Reserve cre d it;
that speaking generally th is p o licy has not succeeded; that there has been
a great expansion of member bank credit and brokers loans; that the
situ ation i s a l l wrong, and pressure must be applied.
He pointed out that the b i l l rates had reduced acceptances, and he
b elieves th is is necessary in the present situ a tio n ; that there has been
a net increase of gold imports o f 37 m illio n s in the past year; that since
the Board issued i t s warning they have vigorously worked along the lin e s
o f d irect action , but we have done a l l we reasonably could be expected to
do; that loans on c o lla te r a l are only s lig h tly le s s now than in February;
that brokers loans have increased; that the Board has accomplished much
by i t s warning, but the question i s , "Are we getting now what we want
through d irect action ?"
Dr. H ille r asks him to state what i t i s we want.
He did not answer th is question d ir e c tly , but l e f t i t cle a rly to
be implied that what the situ ation demanded was a cutting down o f speculative
loans ont'the Hew York Stock Exchange. He said that member bank credit was
s t i l l expanding; that as the resu lt o f our finning p o lic y , there had bean
a continuous firming o f in te re st ra te s; that the situ ation probably would
ultim ately s e ttle i t s e l f without an 'in crease,b u t what he hoped fo r was an
increase in discount rates as a more speedy settlement of conditions so
as we could give lower rates to agriculture and business.
He then asked what i t was the Federal Reserve Board wanted, and
Mr. James replied he wanted a cessation o f abuse o f Federal Reserve c r e d it.
He again said that the ultimate problem was how to give business lower
r a te s; that ultim ately we may have to buy se cu ritie s to ease up the conditions,
but he could not say when the time was to begin th is p o lic y .
Dr. M ille r says that he can say .what the Board wants.
4.
Governor Harrison said that, in h is opinion, d irect pressure
should he continued, hut a ssiste d by increased r a te s. He said frankly
he did not know whether the 6$ rate would accomplish th is ; that we may
have to go to 7$ or higher; that he f e l t the job could he accomplished
more quickly i f we at once increased our rates; that under increased
rates direct pressure would operate more uniformly; that i f the Board
or the hanks were to try to go to the extreme of rationing c r e d it, i t
would at once make rnnicky conditions a r ise , and would he very dangerous;
that Chicago c a llin g i t s loans brought pressure on New York, and fo r a time
caused almost a panic in New York, because of the rumor not of direct
action , hut that credit might he absolutely denied to member hanks; that
an arbitrary refusal of credit would he dangerous.
He said that h is Bank declined to
c a llin g o f loans or the fix in g o f c a ll
assurances that i f a panicky condition
Federal Reserve hank would support the
th is to Governor Young.
advise any member hank as to the
loan ra te s, hut i t had given
were suddenly to a r is e , the
market; that he had duly reported
He said that a rate increase was necessary to supplement direct
actio n . He quoted cables from McGarrah and Owen D, Young earnestly
asking fo r a rate increase. He said that Owen Young pointed out that
i t was the c a ll loan rate and not the discount rate that was injuring
Europe and making i t d i f f i c u l t fo r them to keep th eir funds at home.
He admitted to Governor Young that probably there r/ere some hanks
abusing credit f a c i l i t i e s hy frequent borrowings, hut he said that he
took th is up with them as fa s t as the occasion a rose; that r e a lly there
was l i t t l e abuse o f Federal Reserve credit today in New York; that
there was no commodity speculation; that the whole problem was an
investment or a speculative condition; that d irect action has accomplished
a l l that can he reasonably expected without an increase in discount
r a te s; that o f course d irect action could he carried further, - fo r
example•
7fe could conceivably order every member hank to reduce i t s loans,
say hy 10$ as did Schacht, hut that the country would not stand fo r th is ,
and i t would probably cause panicly conditions. He said that the h i l l
rate should not he below the discount rate i f we increased to 6$; he
admitted that there was now a serious slowing up o f building operations;
that mortgage loans were now d i f f i c u l t to obtain, and he admitted that
business was being more or le s s affected hy these conditions.
Dr. M ille r asked him what situ ation i t was that he wanted to
correct by higher discount ra te s. He replied the control o f the expansion
o f credit through stock speculation; that the e x istin g rates or lower
rates encourage speculation; that we should, however, continue direct
pressure even with a higher discount rate.
5
I t . M ille r asked, how he could, control the speculative situation
hy increased ra te s. He rep lies that they would check expansion on the
stock maricet “by breaking the market. He said to Dr. M ille r that he f e l t
the e x istin g rate situ ation would ruin us. Dr. M ille r said the object
that the Board has in view is the con trollin g o f Federal Reserve credit
so that only a reasonable amount sh a ll be used in speculative loans; that
with an 8Q?6 reserve, a 5 , 7 or 8f} rate is an emergency rate, and he asked
Governor Harrison v/hat the emergency was.
Dr. M ille r says i t is conceivable that i t may be no longer possible
or desirable to obtain d irect a ction , but i f th is i s Governor Harrison*s
opinion he should frankly say so. Dr. M ille r added that d irect pressure,
in h is opinion, has very nearly accomplished i t s purpose already.
Governor Norris;
W ill endeavor to answer Dr. M ille r*s question as to what the
situ ation is which we desire to correct. He said that the speculative
craze is increasing the use o f credit to unheard o f amounts,"drawing
money from the in te r io r to Hew York, and draining business; that th is
situ ation has decreased the price o f bonds, and has seriou sly affected
building operations; that i t has turned the attention o f business men
from their business to speculation; that i t has diverted funds to New
York; that i t has pressed down savings bank d ep osits; he said he had
traced out one check paid in January which showed $150,000 paid to
Drokers; that the country has become demoralized; that o f the to ta l
credit outstanding, Federal Reserve credit i s only about 3$; that direct
action has not reduced the volume o f credit nor o f brokers* loans, but
that i t has slowed up the rate o f increase; that but fo r the warning o f
the Federal Reserve Board the growth o f speculative credit would probably
have been fa r greater than i t has been; that although d irect action has
produced good re su lts, i t has carried with i t some bad r e su lts;
1.
I t has caused fr ic t io n with the member banks, although
they have reluctantly complied with the Board’ s
warning.
2.
It has penalized the banks which have cooperated, to the
b en efit o f banks which have not, and e sp e cia lly to
the b en efit of non-member banks.
3.
It has raised business rates without correcting the situ a tio n .
As to the lo c a l situ a tio n , Governor Norris pointed out that his
reserve ratio was 10$ below the System average; that discounts were 40
m illio n s greater than at this time la s t year; that the p o licy of low
discount ra tes, on the one hand entice a bank to borrow, and then by
d irect action we refuse them th is p r iv ile g e ; that to go further along
extreme lin e s o f d irect action would be to disrupt the Federal Reserve
System, so fa r as the Philadelphia D is tr ic t is concerned.
I t is hard to. refuse a customer, w illin g to pay 6 $ , when he noints
out that the bank can borrow at 5$ on e lig ib le paper. As to the e ffe c t
on customers rates of-an increased discount rate, i t w ill have very l i t t l e
e f f e c t , as outside o f Philadelphia and Scranton a l l customers now pay
6$, and always have; that probably no customer would have to pay more than
a quarter o f 1$ increase, bringing i t up to 6$.
Governor Norris said we have never developed an acceptance market
in Philadelphia. We have only a small amount of acceptances, and have
no in te re st in the h i l l rate.
To G o v e r n o r young he replied that direct action had not stopped
speculation to any m aterial extent; that we have done a l l we reasonably
could along the lin e s o f d irect a ction , and that we need the assistance
o f a higher discount rate; that in Pennsylvania any rate over 6$ is
usu*?y, excepting Federal Reserve ra te s, and that customers’ ra te s,
therefore, could not go above 6$ under the state law, whatever the
Federal Reserve rate; that there i s very l i t t l e frequent or continuous
borrowing in our D is tr ic t today; that only one Philadelphia bank has
been a continuous borrower; that our Directors b elieve that i f 6$ is
not a s u ffic ie n t advance to correct the speculative situ a tio n , - whidfc i s
the real problem, - we should increase to 7$ or perhaps 8$; that he
would favor an increase to 6$ even i f i t had no e ffe c t on speculative
loans, in order to bring the Federal Reserve rate into lin e with other
ra te s; that he b elieved , however, a 6$ rate would have at le a s t a
tendency to help correct the situ a tio n .
*
.
Governor Young pointed out that a speculative movement has never
been corrected by increased discount rates, but has usually ended up
through some catastrophe, and that the Board wishes to try out d irect
action before increasing ra te s.
Governor Norris stated that he believed the stock market is
toppling, and that one or two rate Increases would s e t t le the question.
He admitted to C.S.H . that i f r a te s, fo r example, were to go up to 8$
and continue fo r any length o f time, i t would be a very sad day fo r
business.
8.
Governor Rancher;
tfp to March 8th there was no occasion for higher rates, nor is
there today, unless we look at conditions in other districts.
We
had a gradual liquidation to March 12th, going down 86 millions from
December 23, 1928. Since then there has "been a great increase in membe r
bank loans.
Refers to the usury 6$ law of Pennsylvania; says that our directors
meet tomorrow, Friday, April 5th, but that he will recommend against
any increase, but to wait until an increase is made in Boston, Philadel
phia, or Hew York; that in such event we may have to follow; that there
has been very slight abuse of Federal Reserve credit facilities in his
district; that we have proceeded along the lines of direct action, and
could have been even firmer without resorting to drastic action; that
rates so far have not been a deterrent to business except to building
operations; that an increase in the Federal Reserve rate would increase
the customers rate to 6$; that leaving out consideration of other
districts, there is no impelling reason today for putting up our discount
rates.
9.
governor Seay:
For 18 months have been greatly concerned at the expansion of
credit* The statistics as to brokers loans have obscured the situation*
The problem is a broader one than that. The whole problem is collateral
loans. What is it we want to accomplish? We want to correct credit
inflation, speculative loans. No one thinks that the 5# Federal Reserve
rate is responsible for the high rates on speculative loans, - the fact
is, there has been a very great expansion against the declining gold
reserves of the^ country. When we sold bonds to tighten up the market,
the banks bought the bonds and at once borrowed from us on their* notes
collateraled by these bonds. The great expansion has been accomplished
through the use of Federal Reserve credit. Onee Federal Reserve credit
is issued, it is a permanent addition.
While it is true that Federal Reserve credit is only a small
percentage of the total loans,the banks are borrowing a billion dollars
to support these credits; that some action is imperative to reduce
Federal Reserve credit; that the real security loans are probably 31
billions, including bonds, and not the relatively small amounts brokers
are borrowing.
The present situation is not
speculative situation. There has
of securities, and buyers have to
of them buy purely for the profit
an investment situation, - it is a
been an enormous increase in the issue
borrow to pay for them, and very many
on resale.
Governor Seay pointed out that in 1919 we tried both direct action
and increased rates, and finally agreed on the necessity of increased
rates. He said he believed there was more danger in direct action than
in increased discount rates; that if the banks were required directly to
reduce their loans, it might cause a convulsion; that to increase to 6$
would have no effect on the situation, unless the public believed that
we were ready to go further if necessary; that an increase in the
discount rate is the most effective way to discourage speculative borrow
ing; that the present high commercial rates were causing building
operations to be postponed; that ultimately we are bound to lower rates
to help business and agriculture; that our discounts are larger now
than for four years; that our district is being drained of money to send
to New York; that business is being injured and demoralized in our
district; that there are very few frequent and continuous borrowers in
our district.
He pointed out the large amount of credit in real estate loans
which now, however, are not increasing.
Governor Young states that he
did not desire to contract present credit, but that if future expansion
could be stopped our troubles would be over. Governor Young points out
.
10.
taking gold movements into consideration, Federal Reserve credit has
been about the same for the past five years, 1924 to 1929. Governor .
Seay says he does not agree with this, and does not think that gold
movements should be taken into consideration. Governor Seay believes
that the amount of existing credit should be cut down and not merely
restrained, as to the future.
Governor Young points out tie tremendous cutting down which would
have to be brought about from the reason that loans have increased
against reserves on the ratio of about 15 to 1, and that converse action
might be very serious.
Governor Seay says we have only a few frequent and continuous
borrowers in our district, and that probably few are making speculative
loans; that we could control our banks through direct action probably
easier than could Boston, which is an investment center; that he sees no
impelling reason for a 6°jo rate, if no other bank should increase. Admits
that long continued high rates up to 6, 7 or Qfe would badly injure
business, but not more than the existing injury to business under present
conditions.
Governor Young points out that higher rates, if permanently in force,
would force England to put up her rates, which would cut down her purchasing
power for our exports and seriously affect them, and he asks if Governor
Seay, understanding this, is Willing to go the limit on increasing discount
rates. Governor Seay replied that 7# would be his limit.
li.
Groyernor Black:
Stated that the situation was well in hand in his district;
that there were few if any hanks borrowing frequently or continuously;
that he saw no reason for an increase in the discount rate unless
it was forced on him by the action of other banks.
Governor HcDougal:
The present discount rate is out of line with other rates,
and should he brought into line and slightly above it; that the
expected liquidation in January did not occur, but that the member
bank indebtedness increased 91 million dollars; that on March 15th
his directors practically all favared an increase in discount rates;
that on March 22nd he so recommended to his directors; he said that
the present problem was the tremendous expansion of credit, which
constituted an emergency.
.
He denies that Chicago banks have abused Federal Reserve credit,
but admits that it has been misused by being diverted from business
to speculative channels. We have done about all we reasonably could
by direct action, and we are getting its benefit now.
C.S.H. pointed out to Governor HcDougal that on March 15th, when
his directors wanted an increased rate, the total bills and securities
were 301.1 millions, while on April 3rd they had declined to 243.8
millions, a decline of 57.3 millions, whereas the reserve ratio had
increased from 61.5$ on March 15th to 67.3$ on April 3rd. C.S.H. asked
Governor HcDougal if this decline, about 18$, did not show a fine
progress in direct action. Governor HcDougal gave a somewhat equivocal
answer.
Governor Young asks HcDougal if he would favor going higher than
6$ if necessary. He answered rather equivocally, but finally said that,
in his opinion, we might have to go higher; that in his opinion business
will be less penalized by increasing rates now rather than by waiting;
that increased rates will probably increase customers rates to 6$.
Said that for himself he would favor going higher than a 6$ rate if
necessary, and thinks probably it may be necessary.
Governor Young points out that the expansion since June 28th of
last year is only a little over 2$ in Federal Reserve credit, and shows
progress made under direct action.
Governor HcDougal said the best solution of the problem will be
to have the state of New York make call loans subject to the usury laws.
He said that the New York Federal Reserve bank bill rates have always
followed market rates, and that we should not have a buying rate for
bills which will fill the Federal Reserve banks with acceptances.
Governor Young expresses the opinion that the acceptance rates
are not too high; that the trouble is we really have no open window for
acceptances, and cites Governor Harding’s failure ih distribution to his
bills.
Governor Worthington;
Three weeks ago some of our directors wavered as to the question
of increasing discount rates. Last Thursday there was a strong feeling
that we should increase to 5$ because we were out of line with customers
rates and not because of speculative loans. T7e voted not to increase,
but if New York and Chicago increase, we will vote to increase to 5$.
Some of our directors wish to go up to 5$ in any event.
There is little or no abuse of Federal Reserve credit in this
district, and no need for veiy much direct action. ?fe really began
direct action about a year ago.
There followed a discussion between Governor Young and Governor
Calkins as to whether the Governor’s memorandum meant that a rate
increase is necessary or merely desirable. Governor Calkins said it
meant that it was desirable but not absolutely necessary.
Governor Norris states that the memorandum does not mean that a
solution can not be obtained by direct action, but that it is merely
desirable to increase rates in addition to direct p.ction.
is.
governor Martin:
Peels that direct action had a good effect in his district: that
it caused the liquidation in brokers loans, but that his trouble chiefly
came from large withdrawals of deposits; that they have done everything
along the lines of giving up participation ih government securities, and
in other ways; that deposits now apparently cJ?e slowly coming back;
that we are so tied up with Chicago and New York, that we can not keep
our rates pemanently lower than theirs.
Is inclined to believe that we are forced to increase rates. An
increase to 6$ would not injure business as a whole in his district;
that outside of St. Louis it would greatly decrease the profits of member
banks but would not affect customers rates, as they now pay high rates,
always as higi as 6$, and in some states hitler; that he would dislike to
go up to 6$ unless Chicago and New York does; that he is not prepared at
the present time to go to 6$, apart from the action of the other banks,
but of course he may have to do it. !7e are willing to go to 6$ to help
Chicago and New York only, but if there is no improvement in our reserve
position I shall recommend an increase in discount rates.
Thinks that the withdrawal of deposits is closely connected with
speculation; that there is little frequent or continuous borrowing in
his district; that an increase in rate in the past has always improved
his reserve position; that if speculation should ease down, we would not
want to change our discount rate; that nationally speaking we would be
willing to go to 6$, and further, even to 7, 8 or 9% until the desired
result is obtained*
Governor Geervs
Says he came to the Conference opposed to an increase in rates,
hut, in hi8 opinion, Boston, New York, and Chicago have shown the
necessity for an increase; that such an increase would put our rates
out of line; that there is no reason for an increase in his district
unless the above hanks increase their rates. Thinks very likely that
he could maintain a 4
rate even if Chicago went to 6$/ He certainly
could maintain a 5$ rate as against a 6# rate at Chicago,
Governor Young points out to him that apparently direct action is
making progress; .that many think that Chicago and New York are even
going ahead too fast.
16.
Governor Talley;
We are all very happy over our increase to 5$. The "banks
are cooperating with us. The Board*s warning has had a good effect.
I "believe we should "be cautious as to rate increases.
The whole
question is one of control of speculative credit. We can probably
go farther along the line of direct action. Do not think it imperative
at the present time to increase rates in the country. I have a little
doubt in my mind as to the advisability of immediate increase.
It
may be that e could not maintain a 5$ rate if the other large banks
went up to 6$. Have doubts in my mind as to the advisability of going
up to 6, 7 or 8$ to correct the speculative situation.
Governor Calkins;
Believes that neither direct action nor discount rates alone
can solve the present situation. Believes that it will probably be
necessary to increase discount rates, speaking generally. Thinks
the Governors views expressed in their formula were justified in
spite of the doubts of Governor Talley and others. Says they arrived
at the formula as the result of long discussion. I have advised no
change in the discount rate at San Prancisco, but feel that it may
become necessary.
Heads a printed memorandum.
Says that our rates are now out of line and should be increased;
that direct action has done much and can do more; that we have done so
far as much as could reasonably be expected; that our bill window is
tightly closed by the higi acceptance rates, and in his opinion they
should be kept closed, although he has sympathy for Governor Harrison’s
position.
Believes Federal Reserve rates should be increased at San Prancisco
now, wholly apart from what is done in other districts, to bring the
Federal Reserve rate into line with other rates.
«
A p r il 8
Secretary glass.
October 28. 1919;
\
(Jovemor Harding proposed putting up all rates to 4£$, - the present
rate on 90-day.commercial paper, including paper secured by Government
bonds, with the following exceptions;
1.
15-day collateral notes secured by Treasury certificates.
2. Acceptances
3.
Trade acceptances
4. Agricultural paper
#1 was fixed at
O.S.H. understood this plan was agreed upon by
Secretary Glass, Governor Harding, Mr. Leffingwell and Governor Strong.
Governor Strong said he was prepared to recommend this to the Hew York
directors tomorrow morning, but in his judgment 4 ^ was too low for
15-day collateral notes secured by Treasury certificates; that it should
be
and ultimately
but that Leffingwell felt that any rate over
4^c would shoot to pieces the Treasury policy.
All of the Governors expressed the same opinion, - that we could not
bring about liquidation unless the Treasury as well as all other customers,
were to pay higher rates.
Leffingwell came in and explained the Treasury policies. Said he
wanted to put out an issue of Treasury certificates about November -15th
at 4|-c, In order that he might place in December a larger issue, at 4j$.
Leffingwell said a rate of 4g$ now would smash the Treasury plans.
Later he said he thought he could put out an issue of
in November,
even if he fixed the discount rate at 4|-$, but he rather retracted this
later.
Governor
certificates
it did force
was prepared
Strong said he did not agree to the Treasury policy of issuing
at 4^1, as that rate was too low, and should be 4 even if
the Treasury to change its plans. He said, however, that he
to accept 4|$ if the Treasury insisted.
After an all-day discussion, Strong announced that in view of
Leffingwell*s position, he would advise his directors to fix a rate of
4£f?. He said he feared Leffingwell would think he had gone back on the
schedule they had agreed upon in the morning, and Leffingwell said he
VOLUME 195
PAGE 4 3
felt such was the fact
There was some discussion as to the
rate on 90-day paper
secured by Government bonds. Leffingwell feared it would bring about
a forced sale to the benefit of speculators who would borrow to carry
the bonds they bought so that there would be no liquidation.
Governor Strong said speculators would not buy on a margin during
rising interest rates, but that these bonds would be bought by investors
for cash, and that this 7/0uld bring about liquidation. All of the
Governors agreed to this.
C.S.H. supposed that Leffingwell agreed to the 4$# rate, and also
Secretary Glass, as Leffingwell continually referred to the agreement
as to rates.
At 10:30 p.m. Secretary Glass called
on the telephone. Said
he and Leffingwell had tried to find Governor Harding but could not; that
ne could not come to the meeting tomorrow, and asked postponement until
Thursday.
He was very much stirred up. He said Governor Strong was
trying to dominate the Treasury and the Board; that if we approved the
4i$ rate he y/ould come out publicly and protest; that rates should not
*>
put up on paper secured by Treasury certificates in order to curb
Wall Street gamblers; that credit should be rationed; that the Governors
of the banks had permitted the gamblers to raid the Federal Reserve banks;
that Governor Strong was unwilling to curb them, intimating that he should
press for the removal of Governor Strong; that he, Governor Strong, had
told the Bank of England that he would put up the Hew York rates; that
at a meeting the other day he told him that the Federal Reserve Bank of
Hew York was a central bank; that it had a right to fix rates, but the
Federal Reserve Board had no right to initiate rates, etc. etc.
C.S.H. told Glass that Governor Strong, at the end of the meeting,
said his directors would put in a rate as above indicated to take effect
Thursday morning; that C.S.H. at once told Governor Harding that no rate
could be effected until he approved it; that he at once said so to
Governor Strong who, in C.S.H^s presence, said C.S.H. had misunderstood
him; that there would, of course, be no publicity as to the action of
the directors on Thursday, until the Federal Reserve Board had approved it.
We are evidently in for a terrific fight. All this time C.S.H. thought
Secretary Glass was referring to the 15-day
rate, and he suddenly
said he disapproved the 4f$ rate on 90-day paper secured by Government
bonds. C.S.H. told him he understood that Leffingwell and he did not object
to this rate, and that it formed part of the schedule Governor Harding
reported this morning as satisfactoiy to him (Glass) and Leffingwell.°
Secretary Glass said Leffingwell had no authority to aporove any such
rate, - that it would injure the Liberty loans, etc.
October 29. 1919;
I
asked Governor Harding about the above schedule. He said it
represented an understanding between Secretary Glass, Leffingwell,
Strong, and himself, and that they had accepted it as consistent with
the Treasury policy.
C.S.H. asked Strauss and he said that while
the Treasury had not specifically agreed to it, as neither Secretary
Glass nor Leffingwell wanted to interfere with our rates, yet they
offered no objection to it as being inconsistent with the Treasury
policy.
■
Governor Harding and Strauss both pointed out that member banks
generally had marked up their rates to their customers on paper secured
by Liberty bonds to 5$, and that the n6w rate of
would still be
profit to the member banks.
Governor Harding said he feared the expansion was so great in the
country that a panic worse than 1907 might come if we did not force
liquidation. Strauss said an advance in rates would help but little;
that it must be accomplished by vigorous credit rationing. C.S.H. told
him he said this to Strong yesterday, who replied it could not be done.
Strauss said he absolutely disagreed as to this, The matter went
over until tomorrow.
October 30. 1919i
Governor Harding said Strong telephoned from Hew York that his
directors feared a
rate would depress Liberty bonds to 90, and
might cause a panic. He will reconsider the whole matter.
October SI. 1919;
i- i a
J°vernor s*r°ng is here in consultation with Governor Harding. C.S.H.
to d him he had told Leffingwell he had played absolutely fair with
him. He said he would have to insist on rate advances; that the
reputation of the Hew Yoik bank was at stake, etc. etc.
November 1. 1919;
The Hew fork d irecto rs, a fte r the agreement between Secretary
Glass, Stfong, Leffingwell, and Harding, offered an increased schedule
of rates which we at once approved. This schedule l e f t the 90-day
4.
f
rate on eligible paper unchanged at 4|j£, but raised other rates,
making ell war paper rates 4
Our 15-day collateral notes on
90-day paper, except the paper secured by
Treasury certificates,
was made 4j$.
November 5. 6 and 7th^ 1919:
Other Federal Reserve banks submitted rates which we approved
when modified, so as to have uniform rates throughout the system on
war paper, which Leffingwell insisted upon.
November 7th»t 1919s
Strong telephones that his bank will have 100 millions of
rediscounts today; that the demand for funds was increasing; that
he was greatly disturbed and would come down Sunday,
Governor Harding submitted a resolution lowering the required
reserve percentage on deposits at New York. Dr. Miller objected as
this would ratify the course of the Federal Reserve Rank of New York.
Governor Harding said this was better than pulling down the resources
of other Federal Reserve banks, and C.S.H, agreed with him, but
Strauss objected. Finally C.S.H. suggested a vote authorizing the
reduction in the required reserves to be announced in the New York
bank by Governor Harding only in case the facts warranted such a
course. Governor Strauss to meet Strong and Harding in New York
Sunday to confer with the leading bankers.
This vote was passed on the assumption that Counsel had said
it was legal.
Dr. Hiller voted No.
C.S.H. raised the point that such a lowering of reserves might
require a tax to be imposed. Governor Harding said Counsel said no
tax could be imposed for lowering the deposit reserve. We finally
left this to Counsel.
C.S.H. raised the point whether we could lower reserves for
one Federal Reserve bank and not for all.
Later Strong telephoned he would not need to rediscount with
other Federal Reserve banks today.
Secretary Glass came into the meeting in the afternoon.
He
5.
f
said he was glad Strong was scared, and it was monstrous for Federal
Reserve hanks to put up commercial rates to thwart Wall Street speculators.
Governor Harding said Secretary Glass wanted new legislation
forbidding national hanks to loan on call for other national hanks.
We all agreed, - except Dr. Miller, - that the proper way was to
ration credit, although Strong said this could not he done effectively
hut must he done through raterincreases, thus reversing his position of
a year ago. The whole trouble has arisen from the necessity for protecting
the Treasury situation, hut the Treasury assumes the whole responsibility
for this.
Governor Harding read a letter from Secretary Glass stating that
while the Federal Reserve hanks properly looked to the Treasury while its
operations were being carried on, now they must look to the Federal Reserve
Board. C.S.H. does not quite understand this, as Leffingwell still insists
on having rates on war paper made uniform at all Federal Reserve hanks,
although the hanks largely are not satisfied with it.' C.S.H. is inclined
to think that from now on the Board will cease to make Treasury interests
paramount. ,
,
November 10. 1919:
Dr. Miller read a statement to he filed, explaining his opposition
to the Board authorizing Governor Harding to suspend the New York require
ment. It was then voted that each member could file a statement. Governor
Harding and Strauss prepared one which C.S.H. signed, hut C.S.H. added a
postscript to the effect that lowering the reserve requirements was a
public notice of the condition,perhaps unavoidable, in the New York hank,
which the public was entitled to know, and that permitting the reserve
requirements to he lowered might deceive many of the public, while a few
who knew the real condition could profit at the expense of the many who
did not know.
November 12. 1919;
Governor Harding and Strauss reported as to the New York conference.
They said they met Heplin, Alexander, McGarrah, Sullivan, Hines, and others,
who all said they were doing all they could to check speculation; that
the speculation was not being engineered in New York, hut by western
interests; that the stock exchange was to take hold of the situation;
that we should wait awhile to see how matters developed before taking any
drastic action.
One of them suggested that rates should he increased at
once to 6$; that such a rate would probably not discourage legitimate
business. Most of them felt, however, we should wait before any further
rate increase
Governor Harding and Strauss advise taking no further action at
present, and the Board concurred.
It appeared that about 700 millions was being loaned on call by
western banks, and Strauss put the total loans on call at about 2 billions,
but Governor Harding thought only 1.3 billions.
C.S.H. suggested asking each Federal Reserve bank to report on loans
on call made in the Hew York market by its member banks. Governor Harding
feared that this might result in the calling in of loans,which might be
disastrous. C.S.H. suggested he did not want the Federal Reserve banks
to examine individual banks, but merely to give us the benefit of their
own knowledge, which C.S.H. thought would be fairly accurate. Governor
Harding and all agreed to this suggestion.
P.M.:
Strauss reported a very critical condition in Hew Yoik.
loan rate was 25$, but no money is available.
The call
Strong called up Governor Harding and confirmed what Strauss had
said. Said he feared business failures; that he had advised some bankers
to put out some money to help tide over matters, and that this had eased
the situation somewhat. He said he was to be in Washington tomorrow to
lunch with the Prince of Wales. C.S.H. and Hiller said he should not
leave his post in Hew York, and Harding told C.S.H. he bad told Strong
he felt he ought not to leave Hew York, but he said there was no reason
why he should not go to Washington. Q S.H. told Harding that if anything
untoward happened tomorrow with Strong away from his post, he ougit to
be removed. Governor Harding said in response to C.S.H.1s suggestion
that we might order him not to leave; that if after such order he should
leave, we mi git have to remove him, but that he feared that migit
precipitate a panic,
C.S.H. can not help feeling some lack of confidence in Strong. His
health is bad, and he is inclined to be panicky, as shown in the recent
rate discussion, when, on vote, the Leffingwell
rate was finally
adopted, but he said 4§$ was absolutely necessary, - then he went back to
Hew iork and said any increase would hurt Liberty bonds. Then he came
back demanding higier rates, and finally compromised.
Hovember 13. 1919*
Governor Strong before the Board.
Said conditions were better late
7.
yesterday afternoon; that he suggested to HcGarrah to go to the hankers
and advise putting out some money to ease matters; that 23 millions
were secured hut only 6 millions were used; said that he suggested to
HcGarrah to do the same today, if necessary.
Governor Strong said he did not favor exercising any such control;
that the only effective way was through increase in discount rates;
that these would control if the rates were effective.
Secretary Glass, Leffingwell, and others disagreed with him, and
believed that higher rates would rupture the Treasury policy and injure
the country, all of which he believed to be "bunk.”
Strong said he had loyally carried out the Treasury and Board policy
of control, other than by raising rates, and weald see this particular
crisis Vnrough, but- dfter this he would resign rather than continue any
such policy. He quoted B&ghot to the effect that in every war the
insinuous hand of the Treasury appears; that they had had the same
struggle last sterner in England, and that the Bank of England had put
up rates so that the British loaning rate became 5j$. He said that last
August when Treasury revenues began to equal expenditures, rates should
have been put up whatever the result on Treasury operations. He said
the argument that the rate power in other countries did not succeed in
bringing about liquidation, was because these rates were not effective
because of the preferential rates on war paper, and that the same
situation existed in the United States; that at the last conference with
us he wanted all rates put up to 4f$,
C.S.H. says this was true, but after arguing all day he finally
s^S®8^®*! the 4^e certificate rate, because of Treasury insistence,
and ne went back to lT©w York and the same morning reported against any
increase because he was fearful of injury to Liberty bonds; that later
he came down and again demanded an increase.
C.S.H. believes that whatever Strong*s views are, he certainly
reached an agreement with the Treasury, which was reported to us at
that conference. He admitted to C.S.H. that the whole question hinged
on whether the Treasury policy of low rates was correct, and C.S.H.
suggested to him that we did not fix Treasury policies, but that the
Board did not feel it could deliberately wreck a Treasury policy decided
upon by the Secretary.
C.S.H, believes that the whole trouble with Governor Strong is
that ne did not go to the mat with Leffingwell, but compromised, and
it was on this compromise that the Board was called to act. C.S.H.
still believes that higher rates would certainly wreck Treasury policies,
and perhaps force a refunding of all outstanding bonds, and he does not
8.
■believe that higher rates at this stage would check speculation,
although some increase, of course, should he made, and in fact has
been made.
The Board, for a long time, has tried in every way to discourage
speculation. It could not stop speculation now by drastic rate
increases without playing havoc with Treasury policies.
Novembe r 15. 1919;
Leffingwell told C.S.H. that Strong took part in a meeting at
the Bank of England, and encouraged the bank to put up its rates and
force the Treasury to put up its rates for Government loans, promising
on his part that the Federal Reserve banks, or at any rate the Federal
Reserve Bank of New York, would do the same. That Leffingwell considers
he is thus committed to this, and that this explains his action as to
rates; that Strong had told him this, and that he (Leffingwell) at once
repudiated any such agreement, and told Governor Strong that he had
no authority to speak either for the Board or the Treasury. He said
that Governor Strong was a very sick man, and had lost all sense of
proportion; that while putting up our rates might necessitate higher
Government rates, he would not worry about this except for the fact
that it would force Government bonds out of the hands of holders, and
thus be of great injury. He said he fully appreciated that we must
gradually increase rates, but should do so veiy cautiously, and that
in a tfery few months the Treasury would be in such a good position
that the Federal Reserve rates would be a matter of indifference to it.
November 19. 1919;
At 12:45 the Board and the Governors of the Federal Reserve banks
met at the office of the Secretary of the Treasury. Secretary Glass
outlined briefly, and Leffingwell in more detail, the Treasury policy,
stating that the coming issue of 500 million Treasury certificates
would be issued at 4
and that the remainder needed probably at 4|$.
Secretary Glass then cited the action of the Federal Advisory
Council advising against further rate increases before January 1st.
He said rates should not be increased until the Treasury was out of
the market, but that what was needed was credit rationing to put down
the speculators. Governor Strong, with some vehemence, then said
that this could not he done; that the only way was a tadical increase
in rates. Secretary Glass replied with some heat that it could be
done and must be done; that it was successfully done by the Honey
Committee during the war. Governor Strong replied that the way it was
done was to pay off the loans made to the call loan market, and that
that would require today 700 millions of dollars.
9.
Secretary Glass said that the New York hank had fa lle n down
and permitted i t s assets to he infringed upon hy speculators. Governor
Strong replied with some vehemence that the Hew York hank had done much
to exercise a restraining influence.
!Ehe matter comes up again tomorrow, and Governor Strong w ill try
to carry the Governors with him.
Secretary Glass la te r came into C .S .H .*s o f f ic e , who reminded him
that Governor Strong said nothing could he done while money from other
d is t r ic t s was pouring into the New York c a ll loan market, and that we
must meet th is and put a stop to i t . He agreed, and said he would see
Governor Harding.
C.S.H, f e e ls that Governor Strong is eith e r unwilling or lacking
in courage to cope with the situ a tio n , and in h is weakened physical
condition may soon make some dramatic coup and leave the hank. C.S.H.
fe e ls that he knows he can not stand the straing much longer, and he
w ill choose a dramatic method o f e x i t .
Secretary Glass said that at one interview Governor Strong even
denied the right o f the Board to review rates established hy the New Yoik
hank.
At the Board meeting today, Hr. Forgan came on and read the
recommendation o f the Federal Advisory Council against rate increases
p rior to January next. He said that before Leffingw ell came into the
meeting the Council a l l favored a vigorous advance in ra te s, ignoring
the e ffe c t on Treasury p o lic ie s , hut that Leffingw ell convinced them
that th is rould he a grave error, and would seriou sly a ffe c t the
outstanding bonds.
Novemhe r 20, 1919?
Meeting o f Governors continued.
Host of the Governors did not concur in the recommendation o f the
Federal Advisory Council. Governor McDougal pointed out that their
recommendation was that rates should not he advanced at present, the
heading o f th e ir report, - rates up to January 1 s t , - being merely the
heading of th is topic made hy the Federal Reserve Board. On th is statement
some Governors changed th eir opposition. Many, however, followed
Governor Strong in wanting a change in rates before the coming issue of
Treasury c e r tific a te s on December 1 s t , at
Governor Strong said that i f no change were :made p rio r to th is issu e ,
10
we should he morally hound to keep a rate o f
the issu e .
.
during the l i f e o f
Governor Morss pointed out that there i s much speculative a c tiv ity
in business; th at, fo r example, a cotton concern would he offered a
contract fo r a year ahead; credit being cheap i t would borrow at low
rates to buy raw m aterial, and would be able to take advantage of high
or higher rates fo r i t s fin ish ed product. He strongly advocated higher
rates, even for commercial peper, in order to regulatd production and
consumption. He said the country was being flooded with products of
tne kind known as^luxuries, which also should be re stricte d by higher
r a te s. He said the vast m ajority o f new credits were fo r business as
opposed to stock market transactions. Governor Strong took the same
a ttitu d e .
Governor Strong pointed out that the Treasury called usually fo r
larger sums than were needed, in order to give subscribing banks a
Government deposit fo r which no reserves were necessary, and which they
could keep fo r periods of 60 days or so, and loan; that they made over 6i
out o f these deposits o^ the proceeds o f 4
c e r t ific a t e s . He sug ested
the p o s s ib ility o f cutting down Treasury o fferin g s to the absolute needs,
the proceeds to be drawn_by the Treasury at once~ and put in Federal
Reserve banks, and to compensate for the lo ss o f use of dep osits, the
c e r tific a te s should be given a higher rate; that in this way the credits
could not be used fo r in fla tio n purposes.
November 31. 1919;
^ Conference o f Governors resumed. A ll fe e l that Leffingw ell is
absolutely wrong in xoutting oxt Treasury c e r tific a te s December 1st to
aS the l3anks 77111 loan out the deposits created by th eir purchase
o f Treasury c e r t ific a t e s on c a l l , thus increasing the in fla tio n and'
speculation,
Leffingw ell t e l l s C.S.H. that Governor Harding had absolutely
‘-lUln-o r i't2r to turow out to the Governors any intim ation or su g ^ s tio n
that Treasury c e r tific a te s might be issued in smaller amounts to 'be paid
o^_ by the banks at once, and at a higher rate to compensate f o f the^
lo ss of the dep osits. He said the banks would never do th is unless
paid a commission fo r placing the notes.
.
/
C,S.H. fe e ls that Leffingw ell is in a personal quarrel with
Strong, and that neither w ill y ie ld .
November 26. 1919:
Secretary Leffingw ell t e l l s C.S.H. he has about made up his mind
that Governor Strong ought to be removed. C.S.H. suggested that he
f i r s t take up the matter with our Government directors o f the New York
bank, and he agreed to t h is .
Secretary Glass asked the Board to hear
Leffingw ell on the New York bank matter.
Leffingw ell came in and said that Governor Strong, at a meeting of
the Bank o f England, had encouraged the bank to put up i t s rates so as
to force the B ritish Treasury to pay h i^ ie r rates for th eir borrowings,
and that he had pledged the Federal Reserve Bank of New York to do the
same; that he was now unable to carry out h is part of the agreement, and
was determined to wreck the Treasury p o lic ie s in revenge; that putting
up the
c e r tific a te rate to
was teatpB3®a*&y designed to prevent
the sale o f the new
c e r t if ic a t e s ; that putting up rates on paper
secured by Liberty bonds would play havoc with the bond market; that
a rumor had got out that the New York bank was to put up rates ju s t
a fte r the Governors l e f t Washington, and as a resu lt large quantities of
United States se c u ritie s had been thrown on the market, and the Treasury
had to buy a-very large amount to steady the market; that yesterday alone
the Treasury had to buy 12 m illio n s; that one grade o f Liberty bonds was
now s e llin g on a
b a s is ; that he believed these bond sales had been
made by Hin siders” - e ith er directors o f the Federal Reserve Bank of
New York or th eir friends who had inside knowledge that rates were to
be put up.
.
He also said Governor Strong had told him that he did not expect
our Board to approve the proposed increase; that friends o f h is in New
York had told him that certain o f the New York directors had said they
were whipped into agreeing with this increase, although Governor Strong
claimed they had forced him into i t .
He also said that th is morning a prominent banker and intimate
friend o f Governor Strong said that a l l h is friends were worried, about
him; that in h is state o f health they feared he and the other New York
directors might do something im pulsively to rock the boat, and do great
damage.
He also said Governor Strong had dominated the other Governors,
mentioning p a rticu la rly Governor Morss. C.S.H. quickly denied th is , and
said Morss was absolutely independent, a man o f great wealth, who stood
on his own bottom, and he (C .S .H .) said th is although he disagreed with
Morss’ s opinions.
Leffingw ell then said the Governors had dined with Strong twice
before coming to our conference, - once in New York,and again in Washington.
He also said that Governor Strong told Secretary Glass that h is bank had
the right to f i x ra tes, wholly apart from the Federal Reserve Board. He
N
•
.
12
al'sb said Governor Strong said he wanted the increase which our Board
granted to help him:
V
1.
To control stock market speculation.
2.
,
To do away with the dependence of in te re st on bank deposits
on the Federal Reserve rates. O rigin ally approved by
the Board.
3.
To cease buying b i l l s in the market at such a ttra c tiv e rates.
He said that Strong, having got th e se -ra te s, did nothing as to
#1» #2 or # 3 , but absented him self from the bank and played g o lf in
Washington. He a lso said that i f the bond market kept steady, the flo a tin g
debt o f over 3‘ b illio n s would be wiped out in 18 months. He said the
situ ation was c r i t i c a l , and that the Board should act at once to save
Treasury p o lic ie s and protect innocent bond holders; that i f the banks
did not take the new
c e r tific a te s the Federal Reserve banks must.
Dr. M ille r said he believed on prin cip le that rates should be advanced,
but that he should vote to protect the Treasury. Strauss said he believed
there was no occasion fo r increasing ra te s, but that i t would have l i t t l e
e ffe c t as the merchants would merely add the cost o f cred its to th eir
p r ic e s.
r
C.S.H. suggested that he summon the Governor and directors of the
Hew York bank and ask fo r th eir reasons. This, however, not to a ffe c t an
immediate decision. Governor Harding said they should have consulted us
before taking any action, and we a l l approved t h is .
Strauss said he had no confidence in Mr. Peabody; that he was too o ld .
C.S.H . moved that in view o f L effingw ell*s statement we c a ll upon
each d irector to inform us whether they had 3old Government bonds in fa ith
of their intended increase in r ^ te s. Leffingw ell deprecated t h is , and the
other members a ls o .
Leffingw ell said that Secretary Glass contemplated c a llin g on the
stock exchange to report ju s t who had sold bonds. He sa id , however, we
could only get a l i s t o f brokers who had sold , and th is would not disclose
the p rin c ip a ls.
C.S.H. said* th is made i t even more necessary to interrogate
the d ire cto rs.
C.S.H. said to Leffingwell that he felt that Strong had staged this
for a dramatic resignation, and asked whether his resignation would cause
13
any trouble in New York. Leffingw ell said No, i t would be a great
r e l i e f to bankers generally. Governor Harding concurred in t h is .
Strauss said a l l o f the bankers he and Governor Harding saw in
New York were increasing rates except Hepburx*, end that Governor Strong
brought Hepburn to the Directors meeting and that he told them he did
not concur in the vote o f the Federal Advisory Council against a rate
increase at present.
C.S.H. wrote Forgan as to th is ,
\
Leffing^rell said he thought the Treasury would be safe about
January 15, 1920.
C.S.H , asked whether the matter could not be reopened in case any
d isa ste r should occur, e .g . as to our reserves, and Leffingw ell said
ce rta in ly ; that he reserved that right even as to his own p rediction s.
Dr. H ille r said he would support the Treasury even though the
reserves went to smash, although he believed bn principle that rates
should be increased.
Leffingw ell said that i f we sustained the Treasury, Liberty loan
bonds would reach par in a comparatively short time. On motion o f Strauss
the Board disapproved the action o f New York in increasing rates, and by
another vote that o f Boston a ls o .
November 29 . 1919;
.
Governor Strong here. Governor Harding said Strong was in a panic;
that he feared an in d u stria l panic, and. said i t would not to do increase
rates now; that i t should have been done long ago; that to do i t now would
be to bring about a c r i s i s .
December 2 9 . 1919:
C.S'.H, has talked with Secretary Glass on subject of giving Governor
Strong a leave o f absence.
January 21. 1920;
The New York bank sent in proposed schedule of 5?$ for Treasury
certificates,
for paper secured by Liberty bonds, and the same for
commercial paper.
14.
Leffingw ell objected "b itte rly , and Governor Harding asked some o f
the Hew York directors to come down fo r a conference. Jay and Alexander
came down, and were closeted with Sovemor Harding, Strauss, and L e ffin g well a l l day.
At noon C.S.H. took Strauss and Alexander in h is auto to the Pan
American lunch, and learned that an agreement had "been reached; that the
Hew York directors should "be informed that they must keep a rate of
on Treasury c e r tific a te s fo r the pre ent, and that i f they did not the
Board would force them to do i t .
l
Alexander went "back with this message, with which he f u lly agreed.
At the meeting, Governor Harding told the Board the Hew York directors
nad accepted h is message, and had unanimously sent in a schedule keeping
on c e r t if ic a t e s , and 5-J$ on everything e ls e .
Governor Harding ttyen announced that Leffingw ell wanted us to put up
commercial rates to 6^, and Liberty "bond loans to
leaving c e r tific a te s
fo r a hhort period at 4 ^ .
Governor Harding said he agreed with th is ,
and that Secretary Glass told him he could not "be at the meeting, hut that
L effingw ell was authorized to speak fo r him. Leffingw ell then came in and
quoted a le t t e r dated December 19th from Governor Strong, saying that at
la s t a fte r years o f e ffo r t h is bank had succeeded in estab lish in g one rate
- or money, and that by th is the Hew York bank had shown i t was a real
central bank lik e the Bank o f England.
Leffingw ell then quoted from Hartley W ithers’ book to show that Strong
was in error and that the Bank o f England did not have one rate fo r money.
In th is le t t e r Governor Strong stated that he had done in two years what,
the Bank o f England had taken 250 years to do, — one rate fo r money.
W ithers’ book shows that the Bank of England rate is only a minimum ra te ,
and that the bank frequently imposes higher rates without changing the
o f f i c i a l bank ra te ,
Leffingw ell said that under the present rate o f 4 %j> there i s a direct
incentive to member banks to loan at 6fo in order to rediscount at
thus
making considerable p r o f i t . He pointed out our low reserve p o sitio n , and
said nothing but a drastic increase in commercial paper rates to 6jo would
control the situ a tio n ; that we were dangerously near leaving the gold
standard; that the expected January liq u id a tion had not set in ; that on the
contrary the member banks had increased th eir loans and investments
enormously since September 1 , 1919, and that the loans and investments of
the Federal Reserve banks had increased nearly 800 m illio n s; that although
the currency in circu lation was decreasing, credits were enormously expanding.;
that soon a new gold embargo would have to be put on, and that we were in
danger o f in fla tin g up to the European standard; that the commercial paper
held by Federal Reserve banks was ’’ bunk” , - that i t was ab solu tely unliquid
and would never be paid.
15.
C.S.H. pointed out that while a 6$ rate might be necessary, yet
an immediate advance to l£0 over the existing rate might well Pive rise
to panicky conditions.
11
flouted th is , but said that i f a panic in Hew York
should bre^k out, he would be glad of i t . G.S.H. suggested going up
by degrees and taking two b ite s of the cherry, but Leffingwell opposed
tn is .
The Board adjourned t i l l afternoon, and C.S.H. in sisted that
Leffingwell should communicate with Secretary Glass as to the proposed
increase to 6 ^ .
~ x
In the afternoon Secretary Glass and Leffingwell kept us waiting
for over lg- hours. When Secretary Glass came in he said he favored
th is immediate advm ce bo 60. C.S.H. said he feared i t might cause
much excitement and uneasiness, and even bring about panicky conditions.
Secretary Glass and Leffingwell both disagreed as to th is , and
asked C.S.H. to explain.
C.S.H. pointed out that d istre ss might arise leading to violent
contraction, and presentation, perhaps, of Federal Reserve notes for
redemption in gold. C.S.H. also referred to the fact that ju s t before
adjourning th is morning Strauss called up Case in Hew York and he la te r
replied that the Executive Committee and Alexander were a unit in opposing
such a d rastic increase; th at Mr. Alexander caid an immediate increase
to 60 would cause much uneasiness; that people would think the Federal
Reserve Board had lo s t i t s head, or that conditions must be very
c r itic a l to call for such a d rastic increase. He also said there was
danger that i t might cause panicky conditions.
Governor Harding said 60 was rig h t both to prevent p ro fit f r om
rediscounting, and because 60 was the legal lim it the Hew York banks
co*uld charge under the usury laws on money loans.
Governor Harding and Leffingwell both said that a 5g:0 rate on
loans secured by Government bonds and Victory notes would do no harm,
as you could not pro fitab ly borrow on Government bonds whentthe discount
rate was 5g0.
Governor Harding moved to fix the Hew York rates at 4J0 for Treasury
c e rtific a te s , 5^0 for Government bonds, and Victory notes, and 60 for
commercial paper.
Comptroller Williams moved to amend by making the rates 4 j0 , 50 and 5J0,
On vote;
Aye - C.S.H., Williams, M iller and Moehlenpah
Ho - Governor Harding and Strauss
16.
At (governor Harding’s request, C.S.H. moved to reconsider so
that he could put the question "before the Board in a different way,
It was then reconsidered.
Governor Harding then moved:
!•
Treasury c e r tific a te rate to he
unanimously passed
2.
D iffe r e n tia l o f l/2*& above Government bonds and commercial
paper. Unanimously passed.
3.
6$ rate on commercial paper.
The vote on this was a t i e .
Dr. M ille r changed his vote.
The vote was:
Aye: - Governor Harding, Strauss and M iller
No:
- C .S .H ., William s, Moehlenpah
Secretary Glass announced that the vote being a t ie had fa ile d .
Williams said that Secretary Glass should v ote. Secretary Glass thereupon
voted Aye, and declared the motion carried.
Dr. .M iller explained h is change in vote by saing that harmony was
necessary; tjfat the Secretary o f the Treasury and Governor Harding
favored a 6^ rate, and he had determined to vote fo r i t ; chat evening at
the pan American reception, Secretary Glass said that C.S.H.- should have
come in and talked with him about the matter before the vote was taken.
C.S.H. replied that Secretary Glass was at h is home i l l , and that he could
not get at him.
Secretary Glass said that since the vote he was not so sure he had
voted co rre ctly ; thqt i t was a l l a matter of conjecture, and asked C.S.H.
i f he r e a lly thought that i t might bring about a sudden injurious contraction.
C.S.H. said that was h is fe a r , but hoped he was mistaken, C.S.H*
added that Governor Harding was to take up the matter with the New York,
Boston, and Philadelphia banks tomorrow, and that i f there was much
opposition, the matter might be brought up again. Secretary Glass said
he regarded tn is vote as only te n ta tiv e , and seemed disturbed and worried
about the situ a tio n .
January 22. 1920 :
Strauss reported that he had talked with Case in New York, who
consulted h is Executive Committee, which had reached the conclusion that
they preferred to have the Board f i x the rates on th eir own in it ia t iv e ,
and not have i t appear that the bank had recommended these r a te s. As
a fa c t, they had absolutely opposed the 6fo ra te .
Governor Harding reported that Governor Llorss, at f i r s t staggered
at this &f> rate, f in a lly said he approved i t , and said his directors
wished to recommend th is schedule and not have the Board f i x i t on i t s
own i n it ia t iv e .
Governor Harding said Philadelphia had also agreed to i t .
It was then voted to n o tify each o f the three hanks,the rate to
go into e ffe c t tomorrow, Friday morning.
C.S.H. fears th is sudden jump may do harm. He does not deny that
such a rate is ultim ately necessary, hut he wished the Board had made two
h ite s o f the cherry.
jtL
' ' 4 b *.
>ERAL RESERVE BANK OF NEW YORK
$
•'
f,
/jtx f
udH
Dear Governor Young:
While as I think you realize, it is difficult if not impossible to
set forth the particular reasons or motives
which may prompt individual
directors to vote at any given time for a change in the discount rate,
nevertheless in a period such as this it is possible to review the more
fundamental factors which the directors have had in mind in concluding that
a change in rate is advisable.
In his letter of February 21, 1929, Mr.
McG&rrah reviewed some of the steps already taken by this bank to prevent
as far as possiole any unnecessary use of
member ban s .
Federal Reserve credit by its
In a general way he also outlined our views with respect to
the function of the discount rate in supplementing steps taken to control an
undesirable expansion of, the country's credit structure.
Also, on several
occasions, I have reported to the Federal Reserve Board in person the various
factors in tne present situation wnich the directors have had in mind in voting
to establish a 6 per cent rate.
It is not necessary now to review these
discussions.
The directors, howr-ver, have requested me to write you in a general way
concerning some of the conditions which have led them to seek an increase
in our discount rate for a number of weeks past.
3roadly speaking they believe such an increase will hasten the time
wnen business may have the benefit of easier money.
Tnere is increasing evidence that the present money market position and
prevailing high money rates which are all above our discount rate are
195
4 5
r
>
2
■beginning to have a detrimental effect on business.
Serious effects may
well be anticipated from the following causes if they continue to operate
over an extended period:
1.
Reduced building construction largely because of
difficulty in obtaining mortgage money and loans,
2.
Postponement of various business undertakings because of
difficulty in financing new enterprises,
3.
Reduced foreign purchasing power for our exportable products
because of reduced foreign financing in the United States,
and because of rising money rates and stringent money
conditions and weak exchanges in such countries as England,
Holland, (Jennany and Italy due largely to our high call
money rates.
It is therefore important for business that as promptly as possible a
more normal financial position be restored under which money rates may be at
lower levels.
The one thing which has prevented and now prevents the restoration of
more normal money conditions is a large expansion of the' credit structure
due largely to speculation in securities.
This credit expansion has forced
j
the Reserve System to adopt f i m money policies, including three increases
of discount rate, the sale of government securities, a restrictive bill policy,
and careful scrutiny of the borrowing of the individual member banks.
These
various steps have to some extent checked the rate of expansion of credit but
they have not yet brought about a condition in which the Reserve System may
safely throw its influence towards easy money.
While the continuance of the policies of restricted purchases of
bills and careful supervision over member bank borrowing alone may ultimately
'•K
have the desired effect, nevertheless in view of the urgent need for
restoring more normal money conditions as quickly as possible in the
interest of -business it seems desirable that further steps be taken to
make Federal reserve policy more promptly effective.
We believe an increase in our discount rate by one per cent will
te a helpful step in this direction because
1.
It will bring our tate more nearly in line with outside
rates, thus removing the temptation to borrow from
the Beserve bank solely for a profit,
2.
a
rate increase quite apart from any psychological reaction
on borrowing member banks will be a definite and
affirmative influence and support to all member banks in
their efforts to control unnecessary borrowings by their
customers.
.
Thus it will have an important effect on member
bank loan policies,
3.
We have in the past had the experience of dealing with possible
abuse of our credit by one group of banks only to have it
manifest itself in another group.
A rate increase will
tend to put pressure equally and simultaneously on all groups,
4.
A rate increase will hare a direct effect upon the possible use
of Federal reserve credit for speculative purposes because a
\
iarge part of the credit now granted on the basis of securities
consists of loans by banks directly to their customers as
distinguished from loans to brokers on the open call money
market.
Recent increases in credit for security operations
1
have teen almost entirely In this form of loan.
In
this district many such loans are being made at rates
"between 5§$ and 6$.
5.
A rate increase would have the further result of giving
definite public notice to the country that the Reserve
System is ready to supplement and support all its other
efforts by an
policy.
Public realization
that the discount rate would be emoloved i n M a ^ w ^
----- —
"
- *
„
repeatedly, if necessary, would greatly strengthen the
effectiveness of the System's policy and in itself hasten
the time when the System might lend its influence towards
easier money conditions.
AS far as the immediate effects on business of a rate change are
concerned business borrowers are already- paying 5f to 6 per cent, or in
acceptance credits over 6| per cent, for their money in the principal centers
and higher figures elsewhere, in many cases close to the legal m a x i m s, so
nCr~aSe ^
thG dir‘count rate t0 6 per cent would probably have little
<_>swct on the cost of funds to husiress.
In any event the directors believe
business cm, better afford to pay a h i ^ e r rate for a short time than even
present rates over too long a period.
Moreover, the influence of credit
conditions upon business is much more Urrgely felt in the market for new
securities to finance new business developments than in the rate which
business pays on commercial loans
“
“
rates.
“
“
-‘U
“ »
^ " l“ , l° >“ 1“ "
sn ti,,i
v, . .
’ so that a hastening of the time when the
»• —
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«*..»»
.. „
„
%■ n.(pv l
6»,I/
A further consideration which our directors believe the Federal
Reserve Board no doubt has in mind relates to the responsibility of this
bank for the administration of Federal reserve credit within this
district.
The responsibility for dealing withthe member banks rests
primarily upon the Federal Reserve banks.
The Board's public announcemat
on February 7 emphasized that responsibility.
The directors now feel
that an increase in the discount rate will aid the bank materially in
performing the duties imposed upon it at this difficult time.
The directors earnestly desire easier money for business.
They
believe an adjustment of our rates to the present money market will
serve to hasten the time when the Reserve System can take active steps to
bring about easier money.
Very truly yours,
(Signed) George L. Harrison
Governor
Hon, Roy A Young,
Governor, Federal Reserve Board,
Washington, D. C.
FEDERAL RESERVE
BOARD
To.
*Date.
Apr. 11, 1929
B. H. Hamlin
From
,> rfi ; » i < ~ w i
At a. regular meeting of the Federal Reserve Board on February 8th,
there was introduced a resolution purporting to amend Section 13 of the
Federal Reserve Act.
You will recall that the amendment was dictated
by me to the secretary during the meeting, consequently, there was
little opportunity for considering it.
Since that time the subject
has had consideration and a substitute is being contemplated for the
original.
There is attached hereto a substitute amendment which
probably covers the question more fully.
Will you kindly give this
your consideration in order that you may have the subject matter fully
in mind.
It is my intention to ask for formal action on the question
in due time.
VOLUME 195
PAGE A7
Baselvod ♦hat the
Federal
Be******'Board
recommend to Congress enactment
o f the fo llo w in g B i l l as an fsaondment to Section 13 o f the isederml
Beaerro Act:
A
B i l l
To amend Section 13 o f the Federal Beserv* Act and f o r
oth er purposee«
Be It en.ac.ted, by the Coast*.oi£_gpuao j > f J ^ ^
fliJ L W ■
F e d e ra l
Code)
second
fte e e rv e
he
fu rth e r
p a ra g ra p h
A c t,
as
am ended,
am ended
th e re o f,
by
a
(F a c tio n
in s e r tin g
new
3 43,
th e r e in ,
p a ra g ra p h
T itle
the
r a t i o n 13
o f
1 3 ,
S ta te *
U h ito d
to n e d l a t e l y
r e a d in g
a *
a fte r
th e
th e
fo llo w * :
*Fxc*»pt *ith the peraiasion of the Federal B©servo
Board and subject to such rulea, regulations, lim itation*,
restriction* and conditions as any he prescribed hy said
Board, no Federal reserve bank shall discount or rediscount
my note, draft, or h ill of exchange for, or state my lorn
or advance to, or purchase any b ill a of exchange, bankers1
acceptances, or foYOrnaamt, State or Jiranieipnl securities
from, or in my other manner extend credit accocmodotlona to,
m y ®Q5j&or bmk which at the timet (1) Hoe locas outstanding
to, or holds the notes, draft* or h ills of exchange o f, any
person, firm, partnership, corporation or as sedation , or
the agent or representative of any person, firm, partnership,
corporation or association, whose principal burdn©** i t 1*
to deal In, or to negotiate purchase* or sals* o f, stocks,
bonds or other investment g o curl tic a (except bond* anti not**
of the rrosormoent of the United State*), either for it s e lf
or for the account of other*; or (3 ) has, in the Judgment of
the Federal Bese n * Bo*rd, unreasonably large amounts of
loons outstanding secured hy, or the proceed* of which hove
been or are to he used for the purpose of carrying or trading
ir stocks, bonds, or other inveatcamt securities, except
Bond* and note® of th© Oovemmeat of the tSsited States* The
Federal Reserve Board 1* authorised and empowered to promulgate
said enforce ouch further rules, regulation*, restrictions and
lim itation* as m y ho necessary to prevent th© use of the
credit resource* of the Federal reserve hank*, either d irectly
or indirectly, for the purpose of financing dealings in stock*,
bond*, or other investment securities, except bonds and note*
of th© iSovernment of th* United State*. *
A BILL
To amend Section 13 of the Federal Eeserve Act and for
other purposes*
Be it enacted by the Senate and House of Hepresentatives of the
United States of America in Congress assembled, That Section 13 of the
Federal Eesdrve Act, as amended, (Section 343, Title 12, United States
Code) he further amended by inserting therein, immediately after the
second paragraph thereof, a new paragraph reading as follows:
"Except with the permission of the Federal Eeserve
Board and subject to such rules, regulations, limitations, re
strictions and conditions as may be prescribed by said Board, no
Federal reserve bank shall discount or rediscount any note, draft,
or bill of exchange for, or make any loan or advance to, or pur
chase any bills of exchange, bankers’ acceptances, or Government,
State or municipal securities from, or in any other manner extend
credit accomnodations to, any member bank which at the time: (l)
Has loans outstanding to, or holds the notes, drafts or bills of
exchange of, any person, firm, partnership, corporation or associa
tion, or the agent or representative of any person, firm, partner
ship, corporation or association, whose principal business it is
to deal in, or to negotiate purchases or sales of, stocks, bonds
or other investment securities (except bonds and notes of the
Government of the United States), either for itself or for the
account of others; or (2) has, in the judgment of the Federal Re
serve Board, unreasonably large amounts of loans outstanding
secured by, or the proceeds of which have been or are to be used
for the purpose of carrying or trading in, stocks, bonds, or other
investment securities, except bonds and notes of the Government
of the United States. The Federal Eeserve Board is authorized
and empowered to promulgate and enforce such further rules,
regulations, restrictions and limitations as may be necessary
to prevent the use of the credit resources of the Federal re
serve banks, either directly or indirectly, for the purpose of
financing dealings in stocks, bonds or other investment securities,
except bonds and notes of the Government of the United States."
F o rm N yr 131 4
O ffice Correspondence
To_
Mr. Hamlin
From
Mr. Wyatt_____:
____ j____
FEDERAL RESERVE
BOARD
Date March 25, 1929.
Subject:.
aro
Dear Mr. Earalin:
For your personal convenience I am handing you herewith
a tentative draft of a regulation designed to enforce the principles
regarding the proper use of credit facilities of the Federal reserve
system laid down in the Board's letter of February 2, 1929, which
regulation I have prepared in accordance with the request made at
the Board meeting on March 21.
I realize that some modifications of and exceptions to
this draft of a regulation may be necessary for practical reasons,
but I understand that the regulation will be submitted to the Federal
reserve
banks before being promulgated, and I feel that the Federal re
serve banks will be in a much better position than I am to suggest
such modifications and exceptions as they may consider necessary.
regulation, therefore, is drawn with this in view and the present
draft was purposely made extremely strict.
Walter Wyatt,
General Counsel.
Draft herewith.
The
X-6275
(CONFIDENTIAL TENTATIVE DRAFT)
FEDERAL. RESERVE BOARD
REGULATION M, SERIES OF 1929.
Loans, Discounts or other Credit Accommodations for Mem
ber Banks having Speculative Security Loans.
SECTION I.
(a )
DEFINITIONS.
Security Broker. Within the meaning of this regulation,
the term "security ‘broker" shall include every person, firm, partner
ship, corporation, company, or association, whose principal "business
it is to negotiate purchases or sales of, or to purchase, sell, or
otherwise deal in, stocks, "bonds, or other investment securities,
either for his or its own account or for the account of others.
C*3)
Speculative Security Loan.
Within the meaning of this
regulation, the term "speculative security loan" shall include every
loan to a security "broker and every other loan the proceeds of which
have "been or are to "be used for the purpose of purchasing, paying
for, carrying, or trading in, stocks, "bonds, or other investment
securities, except "bonds and notes of the Government of the United
States.
Every loan made, renewed, extended or permitted to run past
due after the effective date of this regulation which is secured
oy a pledge of stocks, "bonds, or other investment securities (except
bonds and notes of the Government of the United States) shall be
deemed to be a speculative security loan within the meaning of this
regulation, unless there is attached to the note, draft, bill of ex
change or other evidence of such loan a "written statement signed by
the. borrower to the effect that:
•
m
X-6275
(1)
The borrower is not a security broker as de
fined in this regulation;
(2)
The stocks, bonds or other investment securities
pledged to secure such lsan are, and for at least thirty
days have been, the absolute property of the borrower;
(3)
The proceeds of the loan have not, and will not
be, used for the purpose of purchasing, paying for, trading
in, or carrying stocks, bonds or other investment securities,
except bonds and notes of the Government of the United States;
(4)
The proceeds of the loan have not, and will not be,
loaned to any security broker or to any other person, firm,
partnership, corporation, association or company for the pur
pose of purchasing, paying for, trading in, or carrying, stocks,
bonds, or other investment securities; and
(5)
The proceeds of such loan have been or are to be used
for another purpose, which shall be stated in such affidavit.
SECTION II.
RESTRICTIONS.
Except with the permission of the Federal Reserve Board, no
ral Reserve Bank shall discount or rediscount any note, draft or
of exchange for, or make any loan or advance to, or purchase any
s of exchange, bankers* acceptances, or government, State or muni1 securities (under repurchase agreement or otherwise) from, any
er bank which at the time has any speculative security loans outding.
- ■»
SECTION III.
j
EVIDENCE OF ELIGIBILITY.
In addition to the evidence of eligibility required by
lation A, every application made by a member bank to a Federal
•>
-3-
X-6275
Reserve Bank for any discount or rediscount or any loan,
advance, or other credit accommodation, shall he accompanied by
a statement of the applying hank as to the amount of speculative
security loans, which such hank has outstanding at the time of
such application.
SECTION IV.
PERMISSION OF THE FSDSRAL RESERVE BOARD.
A Federal Reserve Bank desiring to obtain the permission
of the Federal Reserve Board to discount or rediscount any notes,
drafts, or hills of exchange for, make any loan or advance to, or
to purchase any hills of exchange, hankers1 acceptances, or govern
ment, State or municipal securities (under repurchase agreements or
otherwise) from, any member hank within the prohibitions of this
regulation, shall make application therefor in writing or by telegraph
(not by telephone) to the Federal Reserve Board and shall furnish
with such application a full explanation of the circumstances giving
rise to such application and the reasons why the applying Federal
Reserve Bank thinks it should he granted.
I am sending you herewith a copy of my letter to Mr, Creech
about Colonel Ayres’ bulletin for April.
At your request, I am
adding for your own information my view about his last paragraph
which relates to Federal reserve policy.
I believe that Colonel Ayres is entirely wrong in his inter
pretation.
Member banks have not to any extent been borrowing from
the reserve banks because of the margin.
This has neven been tol
erated to any extent and as you know, the objections to it have be
come more acute in the. past few months.
I think that quite contrary
to his statement, it would be fair to say that no central bank has
ever had a discount rate at any time below the rate charged to com
mercial and industrial customers.
This is probably an overstatement
but it is substantially correct when the corresponding classes of
borrowers are taken into consideration.
The Bank of England charges
more on bills than the rate that the bills carry, but the discount
rate of the Bank of England is always considerably below the rate
charged by the joint stock banks to their commercial borrowers.*
*
VOLUME 195
PAGE 48
>
i
A p r il
D e a r M r*
I
th a n k
yon. fo r
T ru s t
w ays
re a d
i t
w ith
g re a t
g la d
to
have
th is
copy
C o lo n e l
A y re s
th o u g h ts
o f
tw o
v o lu m e
h ig h
b u lle tin
le a v e s
e x te n t
th e
causes
o f
fa t
n o t
In
The
g re a te r
any
r illa in
me
to
ra te s
be
in
an
th e
m ent
(tim e s
1922
in d u c e d
w ay
th e
p ie c e
has
I
s to c k
in
w ith
be
by
by
in
C o lo n e l
o f
e ffe c t
o f
m oney
w ith
In
F e d e ra l
th e
(H ilo
T ru s t
th e
a
to
th a t
th e
in
o f
to
fo r
th e
w h ic h
re s e rv e
s y s te m *
a p p e a rs
as
w o u ld
seem
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m a rk e t
th e
to
m oney
w ith
th e
tu rn o v e r* o f
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S o ld e n w e is e r
Com pany
and
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s itu a tio n *
and
th e
seven
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th e
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in
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and
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in c lin e d
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a y
m a rk e t
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p a r tic u la r ly
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tru s ts
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advance
A p r il
a s te r p ie c e *
p re s e n t
a ttra c te d
consequent
a
s to c k s ,
s in c e
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iw
in
q u a n tity
q u e s tio n
r e s u lt*
th e
y e a rs
easy
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is
th e
o f m oney
p r ic e s
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d im e n s io n s
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c e r ta in ly
c o m p lic a te d
s im p li f l o a t io n
s e n d in g
Com pany B u lle t in
p r e s s in g
s t ill
1929
C re e c h :
C le v e la n d
p re s e n t
1 6 ,
S ta tis tic s
in v e s t
'
/.V
* '
A
.
f
(COPY)
FEDERAL RESERVE BANK
OF NEW YORK
April 17, 1929
Confidential
My dear Mr. Platt:
In my letter of April 9, addressed to Governor Young, I discussed
in a general way some of the conditions which have led the directors of
this bank to seek an increase in our discount rate for a number of weeks
past*
When I reported to you on the telephone last Thursday that our di
rectors had renewed their action with respect to the discount rate, I
mentioned that they had done so in view of the factors outlined in this
letter of April 9, and that they had also given further consideration to
the importance from an international standpoint of an early conclusion to
the present strain on our own credit position*
I am writing this letter to confirm some of the matters which I men
tioned over the telephone on Thursday.
In the oast seven years, that is since the end of 1921, the United
States has had a net export balance of merchandise to the rest of the
world amounding to about $4,850,000,000 and to Europe alone about
$8,000,000,000* In the year 1927 net exports of merchandise to Europe
amounted to $1,046,000,000 and in 1928 to $1,126,000,000*
In face of the magnitude of these figures we must necessarily give
consideration to the effect upon our trade and commerce of a continuation
of our present credit situation. With the floatation of foreign securities
in this market practically stopped the payment for merchandise purchased
from this country, together with the movement of foreign funds to New York
for employment in the call money market, has already caused such pressure
on the foreign exchanges as to result in a considerable depletion of the
gold and foreign exchange reserves of European central banks. A s the usual
autumn purchases of cotton and grain would tend still further to depress
the exchanges a continuation of present credit conditions until that time
may possibly result in a serious curtailment of Europe's purchasing power
for our goods this fall unless it becomes possible shortly to relieve the
pressure upon these reserves and to open our market to foreign loans*
Quite apart from our own selfish interest in maintaining a European market
for our exportable surplus is the broader problem of the gold standard
which may be hazarded by too long a drag on foreign bank reserves caused
by high money rates in this country.
World trade means, generally speaking, what the name implies, an
exchange of goods and services between countries. The balance of payments
due on trade between different countries may be settled by the shipment
of gold or by short credits or long term loans.
The easy money policy of
1927 no doubt greatly facilitated the purchase of our crops and other
products during 1927 and 1928. It is possibly true that during 1927 and
the early part of 1928 we loaned too much or too rapidly to Europe*
VOLUME 19$
PAGE 49
At least there may be s o m e ^ the present time our money market is virtualIt is apparent, however, that at
a „reat creditor country, havly closed to foreign borrowers. Havi g
^
warid, we enjoyed for a while,
ing opened our market tooorro*
worid's principal money center and by our
l l n ' l l i
credit sSgrStly S
in tt. stabilisation of both monetary and
economic conditio.
r £ " l ^ S S
^^interest
h ^ t ^ r a l ^ s u c k e d
funds to this market from all over
the world.
i?urot>ean banks of issue, exclusive
Since last July, nine prin P
000 in gold and foreign exof the Reichsbank, lost a p p r o b a t e y
,
estimate for the reason
change. The Keichsbank’s P°«i“ °nJ;s ^
lB included in otter items
that foreign exchange not serving “
L i a b l e that the Heichsbank showed
where it is u n i d e n t i f i a b l e . ^
of 1928, there i s
a gain in both gold and
year their loss in gold and ex
little doubt that since the •
exceeded f l O O , 000,000.
change, considered together, h s
t o i high rates of interest in
Thus we see that largely as a result ot nig
Qf the prin0ipal
A m e r ic a
foreign bank reserves have rap
y in to
disoount abroad have
exchanges are now at the gold
ion’ln credit abroad but rather bebeen advanced not because of any W t o t i
inst ^
absorption of
cause of a need to protect i M i r basic
ressur9 upon the foreign
credit in this market. A contimance o f ^ h l s ^ ^
balanoes now
exchanges will no doubt result
t
ln further shipments of gold to
held by these various banks oi 1SS
pressure it is of course imthis country. How long they can stand
and that i3 that a cent i m
possible to forecast. One thing s
period, at a time when our
ance of the present strain over
y P£o”
borrowers, might seriously
hond markets are virtually ,
1red nurchasing power abroad, prejuaffect our export trade because of
accomplished in rehabilidice the gold standard and "n“
°ttens throudiout the world,
tat ing monetary
need of
^
forts'^towards'easier^money^for C i n e s \ both at home and abroad as soon as
u
iS "
T
£
said°that higher
only aggravate t i t . ^ ^ r ^ s C t T l s
country.
While that might ap-
pear^superficially°to be t - e - e r t ^ l e s s we ^ ^ ^ ^ U a l l y
the fact that at the present itae the call ^
^ ^
lnternational movement
effective rate and the govern. g
between prevailing call money rates
of funds is concerned. The dl8" eP V
h t an advanCe in the redisccwnt
■ and the rediscount rate is now
Cbstantial or comparable increase in call
rate might n<* necessarily make a sub^
“ ® t consideration from every standrates. But even if
we believe, serve to hasten the
point is that higher discount rates woui ,
re tu rn
o f
a b ro a d *
m o re
The
n o rm a l
e le m e n t
I t
is
w ith
f e lt
th a t
i t
is
m o re
n e a r ly
m y
le tte r
i t
is
T h is
w hen
w r ite
in
in
o f
we
a ll
so
lin e
d is c u s s e d
to
yo u ,
r e la tio n
to
I
o f
has
so
i t
on
i t
th e
m any
in
m ake
ra te s ,
am
g la d
to
you
o u r
ra te
p r o b le m s .
Edm und
G o v e rn o r,
W a s h in g to n ,
D .
C .
R e s e rv e
B o a rd ,
th a t
o f
o u r
w h ic h ,
a t
o f
hom e
th e
by
as
and
s itu a tio n .
d ir e c to r s
e ffe c tiv e
and
o f
a
c o m p lic a te d
le tte r
yo u
re s u m e
have
b r in g in g
i t
p o in te d
o u t
b u t
a s p e c ts
th a t
w o u ld
fo r
as
lik e
fu rth e r
yo u
to
in
L .
H ftr r is o n ,
s u g g e s te d ,
have
me
c o n s id e r a tio n
y o u rs ,
G e o rg e
P la tt,
F e d e ra l
b o th
essence
ra te .
th a t
th is
tr u ly
(e )
V ic e
m ost
scope
d e s ir e d
th e
m in d
d iffe r e n t
th e
is
ra te
o u r
te le p h o n e ,
send
in
our
above
V e ry
H o n o r a b le
w hat
becom e
fa c to rs
to
w e ll
is
now
o u ts id e
a re
co ver
w h ic h
has
th e s e
w ith
9 ,
s u b je c t
to
tim e
im p o r ta n t
A p r il
d iffic u lt
ra te s ,
o f
G o v e rn o r
FEDERAL
RESERVE
BANK
OF
P H IL A D E L P H IA
A p r il
F e d e ra l
R e s e rv e
B o a rd ,
W a s h in g to n ,
D ear
D *
C*
S ir s :Y ear
w as
1929*
2 4 th ,
re a d
1 7 th *
to
In
le tte r
th e
th a t
# 1 *
B o a rd
d a te d
o f
c o m m u n ic a tio n
The
in
its
by
m ost
The
w ith
le tte r
o f
B o a rd
B o a rd
ta in
The
as
a
o f
bank
w is h e s
re a s o n s
fo r
r e fle c te d
th e
n o t
know
o f
and
show n
o f
a d v is e
th e
th e
to
ob
o u r m em ber b a n k s *
good
in
th e
th o s e
fa ilu r e
D ir e c to r s
a re
c o n d itio n
s ta te m e n t
to
D ir e c to r s
a p p a re n t
th e
in
c o n ta in e d
B anks*
th e
fro m
r e s u lts
B o a rd
m a tte r
th e
i f
th e
A u s tin ,
on A p r il
e x p re s s e d :
c o m p a r a b le
th e
th e re
p re s e n t
o f
our M r.
m e e tin g
is
R e s e rv e
c o o p e r a tio n
th a t
to
its
a c c o m p lis h e d
th a t
fo r
a t
B o a rd
2n d ,
F e d e ra l
re q u e s t
to
th e
a d d re s s e d
hank
th e
c o n s id e r
fe e l
in
has
re a s o n s
r e a s o n a b le
bank
o f
F e b ru a ry
th e
d e lp h ia
1 92 9 ,
th is
s u g g e s tio n
m akes
th e
o f
bank
th e
o th e r
to
B o a rd
1 6 ,
v ie w
th e
P h ila d e lp h ia
# 3 *
th e
P h ila d e lp h ia
c o n n e c tio n
# 2 *
A p r il
D ire c to rs
o f
and
th e
P h ila
s u ffic ie n t
th is
d is tr ic t,
P h ila d e lp h ia
as
bank*
f
# 4 *
A re
th e
D ir e c to r s
p r a c tic a l
bank
to
in to
c h a n n e ls
W h ile
th e
m e th o d
p r in c ip le s
th e
s e t
p ro te c t
its
n o t
D ir e c to r s
fo rth
in
d e e p ly
o f
w h ic h
th e
B o a rd
c h a n n e ls
n o t
c o n te m p la te d
th a t
to
fa c e
w ith o u t
w ith
th e
som e
use
In
# 1 *
tim e
o f
any
been
b r o u ^ it
a *
VOLUME 195
PAGE 50
such
a n s w e r in g
I t
o f
has
is
th e
about
T h e re
tru e
m e th o d s
fa c ilitie s
by
le tte r
and
th e
A c t,
m ig h t
o f
r e a s o n a b le
e x h a u s te d
o f
th e
th a t
F e d e ra l
R e s e rv e
a re
F e b ru a ry
cause
F e d e ra l
be
s e r io u s
in
2nd,
in
and
th e
been
h a rd
A c t?
h a rm o n y
a rt
c r e d it
b ro u g h t
to
w ith
p r e v e n tio n
R e s e rv e
has
w o u ld
o u r
d iv e r s io n
bank
Bank
and
by
a g a in s t
c o lle c tiv e ly ,
"seepage"
th e
as
and
P h ila d e lp h ia
B o a rd 1s
by
e v e ry
e m p lo y e d
d iffic u ltie s
fa c e
o v e rc o m e
ru p tu re s *
th e
s e v e ra l
has
o i^ th e
te rm e d
d is tr ic ts
by
o p in io n
c r e d it
in d iv id u a lly
p r a c tic a l
o f
th e
been
c o n te m p la te d
th e
e q u a lly
in to
c o n c e rn e d ,
o f
has
been
re s e rv e s
o f
and
its
th a t
th is
Bank
a re
b o r r o w in g s
th e
a re
lo w e s t
h ig i*
a t
T h is
th is
has
re a s o n s :
th e
in c r e a s e d
seasonal
dem and
fo r
p r o d u c tiv e
Federal Res'- ‘
re Bank of Philadelphia Page No
purposes*
b* With call money bringing from 8 to 15 per cent in New York,
it is practically impossible to attract funds to this Fed
eral Reserve District where our legal rate is 6 per cent and,
in addition, a large amount of money usually loaned in this
District by banks, individuals, and corporations located in
this District has been withdrawn and sent to the New York
market. This, combined with a shrinkage in deposits occas
ioned by high money rates, has compelled some of our leading
banks to lean quite heavily on this bank to take care of their
legitimate business*
c* Our member banks and trust companies have had to take care of
considerable re-financing, much of it essentially of a oommer*
cial nature, illustrative of the transition in the character of
corporate financing that is occurring at this time.
In answering #2. The Directors of the Philadelphia bank had sought the coopera
tion of our member banks even before the issuance of the Board s letter
of February 2nd, and have continuously done so as they believe it to be a
sound, fundamental policy* The Directors also feel that through their
offices we have received a reasonable amount of cooperation. N6t satis
fying in the light of our reserve and the amount of borrowing today, but
measured from the standpoint of the difficulties the district has been
laboring under, as set forth above, we feel the cooperation has been com
mendable and has prevented a worse situation. In considering this point,
there has been an unwillingness on the part of member banks and trust com
panies to liquidate at a loss their holdings of government securities* In
many cases these holdings were accumulated as a secondary reserve and are
being so used at this time in borrowing from this bank* Many banks in this
district are carrying large amounts of Treasury obligations, which were put
out last summer at such rates of interest that they cannot now be sold ex
cept at a discount of 3% or over* In the case of some banks, such sales
could not be made without materially reducing surplus* As our banks have
always been liberal subscribers to these issues, in good times and bad, we
feel that it w^ould be an undue hardship to enforce immediate sale at such
a sacrifice*
In answering $3* It is unnecessary for us to repeat, for what we have said in
answering #1 and #2 covers this*
In answering #4*
We wish to say that we will enumerate that which we have done:
a*
Established the principle of cooperation with the member
banks. This effort has been carried out by personal inter-
▼levs by both the Governor and Deputy Governor with
member banks wherever the nitration seemed to require
it.
.
.,/■
_
J
f
"
■
b.
jiftftT the receipt of your letter of ITebruary ^nd, the
Directors instructed the officers to issue a letter to
all member banks. A co^y of this letter, which was
submitted to and approved by Governor Young before
issuance, is enclosed.
c.
As you know, the question of raising the rediscount rate
has been freely discussed.
Jho only other instrument we know of it to deny discount
privileges to ra «ber banks when they are using these
privileges and, at the same time, making or maintaining
call loans to brokers. It would be very difficult, if
not impossible, to make the distinction betveen legitimate
collateral loans and so-called "call* loans to brokers
for speculative n unos-s. Morewer, the exercise of such
a function iaay well be frau^it vith such serious results
that it is not to be contemplated, unless the situation
warranted a unifona practice throu^iout the entire system,
and exercised only by some well defined rule of reason.
This Board would respectfully add that in its opinion, the of.icers
of this bank have enforced the policy above mentioned as rigidly as m
the jud^jaent of the Directors is at this tine advisable.
Ter; re ape otf) illy.
(a) Harry L. Cannon
Acting Chuixman of the Board.
States views ex-pressed fry Federal Reserve Board.
Our directors are in harmony with these views.
Board has met particular
difficulty hard to overcome without the use of such methods as might cause
serious ruptures.
Explains decline in reserve percentage caused by
increased seasonal demand for productive purposes.
.
,
•
Money usually loaned in this district hy hanks, individuals and corpora
.
\
'
''
tions located in this district has been withdrawn and sent to the New York
raarke t•
•
_
The above combined with a shrinkage in deposits caused by high money rates
has compelled some of our leading banks to lean heavily on this bank to
care for their legitimate business.
Our member banks and trust companies have had to take care of a consider
able refinancing, much of it of a commercial nature, and we sought coopera
tion of our member banks before the Board*s letter of February 2d, and
have continuously done so believing it to be a sound fundamental policy.
We have received a reasonable amount of cooperation.
Considering the
difficulties in the district, the cooperation has been commendable and
has prevented a worse situation. *
The member banks and trust companies have been unwillifig to liauidate at
a loss their holdings of government securities, which were cumulative in
many cases as a secondary reserve, and are so used at this time in bor
rowing at this bank.
VOLUME 195
PAGE 51
•
.
'*
•
/
#
-2-
Many banks in the district are carrying large amounts of Treasury
obligations put out last summer at such rates that they can not now
be sold at a discount of 3 percent or more*
In case of some banks such sales could not be made without materially
reducing surplus*
As our banks have always been liberal subscribers to these issues, in
good times and bad, we feel it would be an undue hardship to enforce an
immediate sale at such a sacrifice.
Enumerateg
(a)
as to what has been done.
Our cooperation with member banks by personal interviews
whenever necessary.
0>)
Have instructed our officers after receipt of your letter
of February 2d to issue a letter to all member banks.
This was
approved before issuance by Governor Young.
(c)
The question of raising the rediscount rate has been freely
discussed.
(d)
The only other instruction would be to deny discount
privileges to member banks using these privileges and at the same
time making or maintaining call loans to brokers.
Very difficult, if not impossible, to make the distinction between
legitimate collateral loans and brokers loans for speculative pur
poses, and exercise of such a
function
may well be fraught with
such serious results that it is not to be contemplated, unless the
situation warranted a uniform practice throughout the entire system
-3-
and exercised only "by some well defined rule of reason.
In the opinion of our Board of Officers of this hank having
forced the policy above mentioned as rigidly as in the judgment
of the directors is at this time advisable.
F o rm N o . 131.
Office Correspondence
To
FEDERAL RESERVE
BOARD
Date April 2 6 , 1 9 2 9
S u b je c t:, Be sources of each F. R. B ank as of
Mr. Hagai 1*_________________________
In accordance with your telephone request I am giving below certain
figures relating to the resources of federal reserve banks.
Resources
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
$379,^52,000
l,515,gU6,000
370,907,000
**99.295,000
202,983,000
237,813,000
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total
•
$727,323,000
lgg,8g7,000
lHo,OU6,000
20U,113,000
152,608,000
**01.392.000
5,080,665,000
f
Resources of Boston, New York, Philadelphia, and Cleveland,
Percentage of total for twelve b a n k s .....................
Resources of Boston, New York, Philadelphia, Cleveland and •
.
San Francisco .........................................
Percentage of total for twelve banks ........
. . . . .
3.166,892,000
Resources of Richmond, Atlanta, Chicago, St. Louis, Minnea
polis, Kansas City, and Dallas .......................
Percentage of total for twelve b a n k s ...................
1,913.773,000
Resources of Richmond, Atlanta, Chicago, St. Louis, Minnea
polis, Kansas City, Dallas, and San Francisco . . . .
Percentage of total for twelve b a n k s .............
H u u ..
/W
. /L> If.
fU*t*. , UUtM ,
/U__ /Uw
VOLUME
PAGE 52
$2,765,500,000
5**.**
195
,
LUau. ,
. CX&. ,
/6 A ^ ^
6 2 .3
37.7
2,315,165,000
U 5.6
'• /
/
WD3SAL SaSBRTiS CH2DIT
n
Trie question "before us is whether there is an over- expans ion
/
of member Dank loans for investments and. to what extent, if any, is
Federal reserve credit responsible therefor.
I would define over-expansion as follows:
An increa.se of bank credit which produces
purchasing power in excess of the amount of co:i>modities and services available, resulting in
• competitive bidding for a limited supply, causing
increase of orices either of commodities, real
estate, or securities.
Applying this definition to the existing situation it
would appear that the growth of member bank credit in 1928
been exceptionally rapid.
has not
The increase was only 4 percent as compared
with an increase of 8 percent in 1927.
If therefore there is over-exoansion or inflation in member
bank credit it must have been generated during the period of 1922 to
1927 and not in 1928 or 1929.
Taking the period January 1, 1922, to January 1, 1929, we
find that security loans and investments have increased $7,671,000,000
or 52 percent, while commercial loans have increased on^y $1,338,000,000
or 17 percent.
In 1922 security loans and investments constituted 49 percent
of the total, while in 1929 they had increased to 61 percent of the total.
On the other hand, commercial loans in 1922 constituted 51 per
cent of the total, while in 1929 these had dwindled to 39 percent.
Since 1922 security loans and investments have increased over
five times as much as commercial loans.
VOLUME 195
PAGE 53
-2*
It would seem clear from the above that there has been an
over-expans ion or inflation of member bank ^ loansand investments.
This over extension has been made possible by increases in
member bank reserve deposits.
Among the possible causes of these
increases are Federal reserve credit, withdrawal of money from circurlation, gold imnorts, and Treasury credits.
There is also another
cause, namely, a change from demand to time deposits brought about
without the necessity of increased reserves.
2-^
The question next arises how far has Federal reserve credit
contributed to this over-expansion or inflation.
The figures show that from 1922 to 1927 Federal reserve credit
has changed but little and that the over-expansion of member bank credit
must have been based on some or all of the other causes above enumerated.
The figures show that Federal reserve credit had increased on
April 1, 1929, over the average for the years 1922 to 1927 by about
$300,000,000.
This increase however is fully explained by discounts
procured to offset the exportation of gold.
crij
ot
While the total volume a had increased the total amount of
member bank credit did not increase but remained practically station
ary so far at least as regards the increase in Federal reserve credit.
The figures also sho?/ that the member banks during 1927 and
1928 discounted to the extent of about $600,00^,000 to offset gold
exports and also sales of securities by the Federal Reserve System.
This however was net inflationary Had the banks not rediscounted, other
things being equal, they would have had to deplete their loans by 15
A
times this $600,000,000, that is, by 9.6 -billions of dollars,
mien
-3 -
it is remembered that during the deflation period of 1920 there is a
A
deflation of only 2|- billions in member bank loans some realization
can be had of the effect of the deflation of over 9 billions of dollars.
It would then appear that Federal reserve credit^speaking
generally^during the period 1922 to 1929 has been used rather to check
deflation than to encourage inflation.
The fact remains however that the credit structure is now
resting in material part on Federal reserve credit where formerly it
rested on gold obtained through imports, withdrawals of money from
circulation, etc.
It appears that at the present time, after meeting
the demands for money in circulation out of their own resources, the
contribution to the member banks reserve from Federal reserve credit
was 57 percent for the period 1922 to 1927 and 64 percent for 1928
and 1929.
From every point of view it would seem desirable and nec
essary to reduce greatly this percentage.
The B o a r d s warning was intended to bring about cooperation
of member banks, to check further extension of speculative loans and
to bring about a gradual liquidation thereof without an increase in the
discount rate.
It is not possible to measure the direct effect of this
warning for the reason that other causes, e.g., gold imports, with
drawal of money from circulation, Treasury credits, etc., have also
been at work, all tending to produce a liquidation in Federal reserve
credit.
*
Xi is sufficient to point out that, from whatever cause,
there has been a reasonable liquidation of Federal reserve credit going
-4-
on since the beginning of the year 1919.
Taking the dates January 1 and
April 1 the average liquidation by years has been as follows:
1922 to 1927
1928
1929
70 millions
17 millions increase
238 millions
After allowing for changes in the gold stock the average
liquidation was
1922
1928
1929
to 1927
31 millions
73 millions
137 millions
The actual liquidation in Federal reserve credit between the
dates January 1 and April 1, 1929, was 519 millions.
This was brought
about substantially by increases in gold stock,- 72 millions,- and fall
/
ing off in demand for currency,- 395 millions,- and a decline £rr 56
A
millions in member bank reserves.
The liquidation of Federal reserve credit for the System for
the year 1929, taking averages, is well shown in the following table,
and a similar table shows the liquidation for the Federal Reserve Bank
of New Y0ik:.
(Monthly averages of daily figures: millions of dollars)___________
:Total reserve:Total bills &: Dis- : Accep- : Reserve
___________ : bank credit : securities tcounts ; tances ; ratio
System
January
1,613
859
1,570
473
66.8
February
1,502
1,468
889
385
69.4
March
1,481
969
1,442
265
70.3
April 1 to 19
1,375
1,348
1,008
160
72.4
F. R. Bank of N. Y.
January
February
March
April 1 to 19
448
342
345
328
430
329
327
308
246
131
70.4
216
231
258
91
55
22
78.6
79.0
80.0
From the above it would seem reasonably clear that the propor
tion of Federal reserve credit
member bank reserve balances should
not be increased but on the contrary should be reduced and it would seem
to me that this change is being accomplished in the 5 percent discount
A
rate by so-called direct action and the other causes above enumerated
which have been at worl$ and that there is no present necessity for rate
increase to accelerate this change.
The principal reasons advanced by the Federal Reserve Bank of
New Y0rk for an increase in the
— — * —
to put the Federal
Eo my mind, if we accepted this necessity, there would be no
reason for an increase higher than
percent, whereas the New York Bank
requests 6 percent as preliminary to a further advance.
A Federal reserve rate is said to be out of line where there
is an excessive spread between that rate and the open market rate on
couimercial paper and acceptances.
Today the open market rate on commercial paper is about
6 percent and an increase to
percent would make the spread about
one-half of one percent which experience has shown is the normal spread
in recent years.
The obvious answer to the claim that Federal reserve rates
are out of line with the acceptance open market rates is that it has
been put out of line with such rates deliberately oaly to carry out
the restrictive credit policies of the Federal Reserve System.
In
other words, if we were to consent to an advance of 6 percent under
;
our restrictive credit policy v/e should have to increase our buying
-6i
/
rates for 131115 by an equal amount and there would be the same disparage
-*
that exists today.
A)
AMM*
^
' Other reas on\ given for tdse increase at New York are that present
r
•
A
market rates generally are above Federal reserve rates thus
interferr-
/
/
ing with building construction, requiring postponement of business under
takings because of the difficulty in financing new enterprises, redueed *
borrowing in the United States by foreigners thus lowering their purchasing
power
and affecting our exports and
/
of foreign gold which is
/n
rapidly coming into the United States.
The above reasons ordinarily would serve as powerful reasons
re
fer lowering/discount rates rather than increasing them and these various
reasons were advanced in the summer of 1927 for a reduction of rates at
which time rates were reduced from 4 to
percent.
What is the explanation of this apparent anomally that an in
crease of discount rates is now asked for for the same reasons that a
decrease was asked for in 1927.
The real reason is that although in form the New York Bank
asks for an increase in discount rates what it really desires is a
decrease in call loan rates which are responsible for the general in
crease in rates in this country, and believes that an increase in dis
count rates will bring about a decrease in the call loan rates.
To my mind howevex; a simple increase in discount rates to
6 percent would, other things being equal, tend to build a firm founda
/
tion for holding up call loan rates rather than reducing^
%j
The issue before the Board raised by the Federal Reserve Bank
is not however a change in discount rates from 5 to 6 percent but a
crO b ,
.
-7-
•3M*4ra change from the 5 percent rate to a forruMwe rate policy beginning
/
at 6 percent.and going up to any point necessary to correct the speculative
situation in New York.
I quote from the letter of Governor Harrison sent
to the Board dated April 9, 1919.
.
"A rate increase would have the further result
of giving definite public notice to the country that
the Reserve System is ready to supplement and support
all its other efforts "by an affirmative rate policy.
Public realization that the discount rate would be
employed incisively and repeatedlxif necessary, would
greatly strengthen the effectiveness of the System*s
policy and in itself liasten the time when the System
might lend its influence towards easier money conditions.'1
The above brings out clearly the real issue, that is, whether we shall
continue under a 5 percent rate using direct pressure brat restrict
speculative loans, or whether we shall adopt a new policy beginning with
an advance to 6 percent and further advances to any height necessary to
correct the speculative situation.
I
believe that bringing about drastic liauidation in the stock
market is not one of the duties of the Federal Reserve Board; that it
should confine itself to bringing about reasonable liquidation in Federal
reserve credit, and I further believe that such liquidation is now pro
ceeding in an orderly manner without any necessity for drastic, spectacu
lar rate increases.
The Federal Reserve Bank agrees that were it not for speculative
conditions in the New York stock market agriculture and business today
would be entitled to a rate of not more than 4^ percent.
The New Y0rk
directors oelieve however that the quickest way to achieve this is by
nuick increases in rates necessary to liquidate the stock market and then
by reversal to come down to a 4gj- percent rate.
—8 —
I
do not believe that this process could be accomplished^even
if we were ready to adopt^it as quickly as the New Y0rk directors seem
4 4
\
to believe, unless indeed the drastic rate increases were to create a
panicy condition which might injure business almost as much as existing
speculation,
I
.
believe on the contrary that if we were to increase rates
we shall be entering upon a new era of high money rates from which we
l
can not hope to recover quickly, and that the consequent injury to
v
M s *
business will be far greater than an injury we all admit it is now
A
to.
suffering but from which we believe it
gradually b©4stg relieved/
vt> /£***’
,
An increase in discount rates even to 6 oercent would mean
U
r ,-£CU-
*7 r P
A 'tH>
/
/
/Q S L m.
that customers rates in all spates at least would be at once increased
r~
to the great damage of the small business man now being crowded to the
wall by the competition of what we will call "big business",
I freely
admit that big business is not interested, much in the rate question
for many of these larger concerns borrow but little and many are actually
lending surplus funds in the call loan market.
An increase in rates
however would, be very disadvantageous to the small manufacturer.
/uu-A**
The New York directors claim that customers rates could not
be increased very much because of the *State usury laws but under the
^£
4
,r4r4e
j
y
system of requiring compensatory balance I am unable to see how these
. . . . w.
/\
^laws would prevent the member banks from charging customers any rate
they saw fit to impose.
The policy of drastic increases in rates in
order to bring about liquidation in the stock market, even if the Board
should favor such action, could only be accomplished directly by drastic
increases in the rates charged agriculture and commerce.
f
►
I
am unwilling, at least while the present liquidation is going
on satisfactorily under the 5 percent rate, to use agriculture and business
as a cA^ak with which to strike speculation
on the New York stock exchange.
B A
Office of
Chairman of the T,’oard.
Federal Reserve A g e n t . , ather
(
i’
V v.s*. ■
j.)
C-^
V f lC
?.
it
U. 6 ■■1^1 w* X
£'
i • •.
k
’
aod p w tic ttis r iy to any us®- o f ouch credit
borrowing from us and who at the same tims
>ans to
distric
The Federal Reserve board,
Washington, D.C.'
Attention; Mr. b. &. AcCle^land,
Assistant secretary.
Gentlemen;
* . ••>>
four letter of May 2nd in which you review hanking
developments (as disclosed in the statements of condition of 592
v
weekly reporting hanks) since February 6th," received and carefully
noted and will be brought to the attention of our directors at their
meeting on Any 10th, and I am sure tiiat most careful attention will be
giyen the suggestions In your latter.
In your letter you state that there has h,een an improve
ment in the aggregate situation, hut that a detailed analysis does not
appear to show that the improvement in the aggregate situation has been
realized in this district.
' '
figures in your letter are taken from* your statements
ior the press, St. 6172.
In studying your letter I have compiled certain
figures from the game statements to which I respectfully call your atten
tion. The figures compiled by me which I enclose herewith show the fol
lowing situation.
{ \
.
,
iirst: r
Jhe ratio of loans on securities by rer>orting
jaii.-cs in this District to total loans by the same banks on February 6th
and April 24th shows a lower percentage than the same ratio of any other
Federal reserve bank.
-
...
;
„
,
Second; The percentage of decrease of loans on securities
by reporting member banks in this District in the period February 6th to
Aoril 24tn is only three-tenths of one per cent less than for the System
as a whole.
Under present conditions, and conditions that have existed
for more than a year in this District, I feel that our bank has made a
fairly creditable showing, in view of the fact that the ratio of security
loans to total loans of reporting member banks in this District was, and
is now, lower than that of any other district.
VOLUME 195
PAGE 55
r - f; 2V>s ~m*
>j w jl w u
,:..
•• .
otcm
I
am not attempting to justify the full situation
in our district, mis situation hag received my very earnest
attention and my efforts haye been used jointly in the earnest
efforts of the other officers of this bank. We hate given careful
attention to; the uses of Federal Reserve credit in this district
and particularly to any use of such credit hy member banks who were
borrowing from ufc a^id who at the same time had loans to brokers or
dealers in feew fork or elsewhere Outside of this district. I feel
that our efforts in this respect have been rewarded by the situation
in our district relative to such loans.
i
In the condition'report of March 27th, 1929, there
were only six banks which were borrowing from us and had loans to
brokers and dealers in New York ( s e e memorandum attac ed). while
this was a pleasing situation, even so small a sum so used was not
satisfactory to us and on April 30th Mr. Slack wrote to these banks.
I beg to hand you herewith copies of these letters to these banks
and copies of four replies received. This correspondence is sent you
in order to show the reasons given us by these four banks as to why
they had any money loaned to brokers or dealers in New York.
v,„ Hr. Black did not write to the Atlanta & Lowry
National Bank, which reported a snail loan of $45,000 to brokers
and dealers in New York, but saw the Yice President of that bank
who stated to him that that loan was for a cusromer of that bank
and that the bank itself did not have a penny of its own money
loaned to brokers or dealers in Sew York. My further inforraition
relative to this $45^000 item is that it was money loaned for the
Berry School of dome, Georgia, and that the amount has now been
reduced to *5,000. Mr. Black lias not yet heard from the Algiers
Irust and Savings Bank of New Orleans.
* that have existed
Very truly yours, e ratio of »*cur51 v
VQLUMi 195
PAGX 55
n closures.
(Signed) Oscar Newton
Chairman.
Ratio of Security Loans to Total Loans on Fe bruaxy 6 and April 24, 1929,
of reporting member oaritcs in 101 l e a d i ^ c itie s of the United S tates,
and percentage of increase or decrease in security loans from February 6,
to April 24, 1929, reported by Federal Reserve D istric ts.
(Figures in m illions of d o lla rs)
D istrict
February 6, 1929
Loans on
Total
Securities
Loans
Ratio
April 24, 1929
Total
Loans on
Securities
Loans
Ratio
Increase or decrease
in security loans
between Feb. 6 and
April 24, 1929.
U67
1 ,1 2 6
4 1 .5
469
1 114
42.1
0 .4
3 259
6 226
5 2 .5
3 139
6 3’*7
4 9 .5
4 .6
Philadelphia
510
*97
56 .9
519
937
55.4
1.5
Cleveland
712
1 506
4 7 .3
702
1 521
4 6 .2
1 .4
Richmond
202
519
3*.9
191
515
36 .9
5 .4
Atlanta
153
506
3 0 .2
149
513
29 .0
2.6
Chicago
1 155
2 569
4 6 .2
1 201
2 572
4 6 .7
1.1
25*
542
4 7 .6
232
521
4 4 .5
10.1
Minneapolis
54
255
32.9
81
250
3 2 .4
3.6
Kansas City
151
449
3 3 .6
140
444
3 1 .5
7 .3
Dallas
125.
365
34.8
102
350
29.1
20.3
San Francisco
412
1 293
31.9
412
1300
31.7
same
7 555
16 255
4 6 .5
7 335
16 388
4 4 .5
Boston
New 'York
F* Louis
Total United States
-
2 .9
w
*
U1HSFR BANKS WITH OBLIGATIONS TO THE FKDKRAL RESHRVE BANK OF ATLANTA
AND OTHER BANKS, HAVI ^ LOANS TO BROKERS AND DEAL S IN SECURITIES IN
yq- YORK CITY - AS SHOWN BY REPORTS OF C XIDITION AS OF MARCH 27, 1929.
- ft
B/P & Redact!
with F.R.Bank
of Atlanta.
Location
Name o f Bank
Atlanta & Lowry Nat.Bank, Atlanta,Ga.
4 3,575,000
B/P & Redacts
with other
banks •
___
Loans to
N.T. Broker a
and Dealers.
$
8
45,000
Winder National Bank,
Winder, Ga.
29,000
30,000
A lgiers Tr.& Saw.Bank,
New Orleans,La.
245.948
200,000
Hibernia Bk.& Tr.Co.
H
Interstate Tr.& Bk&. Co."
M
"
"
M
Britton & Koontz ’a t.iik ., £«&tchez,Miss.
TOTALS
2,224,500
3,500,000
208,300
1,600,000
97,413.47
$6,480,161.47
224,299.75
59,460.25
$3,500,000.00
42,158,760.00
May 4, 1929,
r. J. H. ilt-iaiaa, Vic8 President,
Winder National Bank,
binder, Georgia.
Jear Mr. Williams:
I
have your le tte r o f May 2nd
explaining that your hank has no funds loaned
to brokers and dealers in New York and that the
fund which appears to be loaned by your bank is
loaned to the City of binder.
With my regards, I am
Yours very tru ly
Governor.
copy
WINDER NATIONAL BANK
Winder, Ga.
May 2, 1929.
r.
. H. Black, Governor,
Federal Reserve Bank,
Atlanta, Georgia.
Dear Mr. Black:
Your le tte r o f A ^ril 30th, referrin g to the
funds we have on c a ll, addressed to our Mr. Maynard, President
o f this institution, has been handed the writer fo r reply.
In July of la s t year the City of binder set
up $50,000 to be used in erecting two school buildings.
There was some delay in le ttin g the contract and the City
Council decided it would be to their interest to place the
funds on interest, and requested us to assist them in that
connection. We placed the funds through our New York corres
pondent, and they have been reduced from time to time as
needed to pay on the buildings, and now stand at $20,000,
which amount is expected to be retired in the next thirty days.
We do not consider this special deposit as our
funds, but hare only handled than to assist the City in earning
something while they were not needed. I f they had been deposited
In the regular course of business we would not have placed them
on c a ll.
.
This institution only borrows funds from the
Federal legerve to meet decline in deposits and to care fo r.
the needs of the farmers, merchants and manufacturers in our
trade section, and the funds we are now using obtained from
rediscounts are covered by loans for this purpose.
Yours very truly.
J. H. Williams,
Vice president and Cashier
Mr. I . 3. Hecht, President,
Hibernia Bank and Trust Company,
New Orleans, Louisiana.
Dear Ur. Hecht:
I appreciate very greatly your
le t t e r o f May 2nd in reply to mine of -April 30th.
I note that the item which you appear
to have loaned to brokers and dealers in New York
is loaned to Curtis and Sanger covering a new Orleans
transaction.
X take this opportunity to assure you
that I knew in advance that I had your co-operation
in reference to the special policy about which I wrote
you, just as I have had your co-operation in a l l mat
ters of interest to the Federal Reserve Bank.
with my warm personal regards, I am
Sincerely yours,
B-C
Governor
HIRBERSIA BANK AND TRUST COMPANY
New Orleans* La.
May 2, 1929
Hon. E. R. Black, Governor
Federal Reserve Bank,
Atlanta, Georgia.
Dear Mr. Black
Your le t te r o f April 30th is accepted
by us in the same frien dly s p ir it in which we fe e l
sure i t was written.
I f the item of which you speak r e a lly
represented what It seems to be on the surface your
coments would be more than ju s tifie d .
However, the
facts are that this $224,000 is not a loan made to a
New York brokerage house on a c a ll money basis, or
for any speculative purposes whatever. It is a loan
to the film o f Curtis 4 Sanger, who maintain a very
substantial account with us and who have borrowed this
money from us, not on New York securities, but on some
s t ric tly New Orleans transaction in which they happen
to be interested at this time.
The rate which we are charging them
is 7^, so that you may readily see how far removed the
loan is from an ordinary New York loan made on c a ll.
You may rest assured that you w ill
continue to have our f u l l cooperation in trying to
carry out the p o lic ie s mentioned in your previous
le tte r, but we fe el equally sure that you recognise
that we cannot refuse to make a legitimate bank loan
to a customer, even though the head o ffic e of such
customer may be in Boston or New York.
With rindest personal regards, I am
Cordially yours
R. S. Hecht
President
Mr. Lynn H, Dinkins, President,
Interstate Trust and Banking Company,
New Orleans, Louisiana.
Dear Mr. Dinkins:
I have your valued favor of
May 1st in reply to my le tte r to you of
Anril 30th.
My information as to your re
discounting during the past and at present
leads me to know that such rediscounting is
on a most conservative basis.
It is unneces
sary to say that we have taken pleasure in
handling your rediscounts for you.
I especially appreciate that
part o f your le tte r in which you assure me
o f your desire to cooperate with me in the
respect urged in my le tte r of the 30th.
' tfith my regards, I am
Sincerely yours.
B—C
Governor.
Y
INTERSTATE TRUST AND BANKING COMPANY
New Orleans,
May 1, 1929.
Hon. E . a . Black, Governor,
Federal Reserve Bank,
Atlanta,
Ga.
Dear Governor Black:
I
have carefully noted your lin es
of the 30th ultimo, and beg leave to request that
you make an examination o f your records in order
to ascertain our position in the matter of redis
counting during the past ten (10) years. In my
opinion this examination w ill disclose that we do
not abuse our rediscounting p rivileges.
At the moment we have on deposit
some public funds which are lik e ly to be withdrawn
in substantial amounts without notice.
We now owe the Federal Reserve Bank
less than 4.10 0 , 0 0 0 , tfiich amount, when compared
with the position of our neighbors, would appear
to be reasonably conservative.
I
co rd ially appreciate the kindly
tone of your communication and wish to assure you
of our desire to cooperate with the agencies you
mention for the purposes you name.
With regards and best wishes,
Yours very truly
Lynn H. Dinkins,
president
Mr. M. R. Beltzhoover, President,
Britton and Koont* National Bank,
Natchez, hiss.
Dear Mr. Beltzhoover:
I
thank you fo r your le tte r of
May 2nd in reply to my le t te r o f April 30th.
I
note the confusion about your
situation arises from the condition report sent in
by your bank. I am delighted to find there w a s a
mistake.
With my regards and apprecia
tion o f your cooperation at a l l times, I am
Very sincerely yours,
Governor.
HatchfcE, bise. May t ,, 192C.
Mr. . . Black, Governor,
federal leserve Bank,
Atlanta, Geo rgia.
Dear Mr. Black:
Deferring to your favor of April 30th J<
was surprised to note that our rooort 3howed that we> g
loaned broker* end dealers in New Y0rk .>{39,460*25, and
in checking up the report find that our Cashier f i l le d
in Schedule 3 5 MLo*ns secured by U. i. Government and
other securities14.
(a ) To brokers and dealers in securities in
Now York City
(b) To brokers and dealers outside N Y City
(c ) To others
.
^
'^
$59,460.25
40,539.75
8,000.00
At that tine nor at auy other time were
we carrying loans for brokers or dealers in New York and
the figures given under item (a ) represented loans to
local customers secured by bonds or stocks lis te d on the
New York Stock iixchange. Item (b ) represented loans to
local customers secured by municipal bonds and other nonliste d securities.
Item (c ) loans to local customers se
cured by Liberty Bonds. A ll of the above are loans to car
custo'-ere secured by securities, but made for commercial
or agricultural purposes and none, so fa r as we know, for
speculative purposes.
\
The only excuse I can o ffer why these items
were itemised under Schedule 3 5 (a ) (b ) (c ) instead o f a l l
under (c) as they should have been, ia that thi3 statement
was made up by our bookkeeper ju3t a fte r the run and closing
of the Bank of Commerce and Peoples Savings -ahk o f tuis
city, and all of our o ffic e rs were very busy *fith the liquida
tion of these banks and we fa ile d to notice the error when
approving the gtat ament.
please bo assured that at a l l times we wish
to cooperate with your p o lic ie s and deeply regret this
error in jut report.
*/ith kindest regards, I am,
Sincerely y>u*s,
V., T. Beltz) oover, president.
•
FSDUHA.L H323FH.VR BANK OF C 'lGAGO
,
May 7, 1929.
SUBJECT:
Board's letter of '/ay 2, 1929, on the subject of the use of
Federal Heserve credit by member banks, etc.
Federal Heserve Board
Washingt >n, D. C.
Gentlemen:
The above mentioned letter has been carefully considered by Governor
cOou^ 1, Deputy Governors Blair and cKay, Mr. Childs, our Controller of Credits,
Mr. Cation, Manager of our Detroit Branca, and rnyself.
In t is letter, the Board specifically mentions four member banks, comment
ing on the fact that these banks have all been more or less continuous borrowers
and have not effected any subst nti&l liquidation in t.,eir loans since February 6.
The Board's letter also contains the following paragraph:
"The Board desires that it be ascertained from each of the member
banks concerned, which has not yet readjusted its position, why it
should not bring about the readjustment expected by the Board."
iiegrrding the four banks specifically named in the Board's letter, I submit
the following:
1.
OSTEAL THU$T CQ I'AFY. CHICAGO.
For tae ye r 1928, this bank was out of debt each monta, except
ust and December. The high point in its borrowings was >10,000,000, and its
average borrowings $2,900,000.
For 1929, it has been a continuous borrower except for one day in
February, the high point being $14,400,000. Its borrowings today are $4,600,000,
with the general trend downward. It is quite probable that its borrowings may
fluctuate both up and down from this amount before it is entirely out of our
debt.
CXir records show the following contact with tne bank in connection
with borrowings since the first of the year:
February 23: Governor tfcDougal wrote regarding Federal Heserve
Board's ubliahed statement.
February 26: 1r. Dawes, Vice-i resident, replied: "Are curtailing
loans and are endeavoring to liquidate indebtedness with Federal Heserve Bank.
March 19: Governor Map— gal interviewed both Mr. Dawes, Vice
President, and Mr. Otis, President, and received assurance that the bank was
endeavoring to put on even greater pressure in the effort to reduce borrowings
and c u rt a il collateral loans.
VOLUME 195
PAGE 57
Federal Reserve Board.
-2 -
Coll&teral Loans are Reported as
March 2?: Loans to brokers
Loans to brokers
Collateral loans
May 1:
Follows:
and dealers in New York
outside of New York
to others
$
0
16.400.000
46.300.000
$
Loans to brokers and dealers in New York:
Loans to brokers outside of New York
Collateral loans to others
14.400.000
38.800.000
Comparison of the above showings indicate that between March 27 and
May 1, loans to brokers outside of New York decreased ,-52,000,000; collateral
loans to others decreased $7,500,000; or a total reduction in collateral loans
of $9,500,000, between the dates mentioned, indicating progress in curtailing
collateral loans.
It 18 expected that the bank will be entirely out of our debt in the
not distant future.
2.
:IR3T ,I3G ■ oIK NATIONAL BANK. MILhAUK
NIS.
For the year 1928, the borrowings of tuis institution were continuous
except for a few days in January and a few days in February. The high point for
that year was $16,880,000, with average borrowings about $8,000,000.
For 1929, borrowings have been continuous to date, the high point
being $16,900,000, with present borrowings of $7,000,000.
Our contact with this bank in connection with continuous borrowings
has been as follows:
Nov. 2, 1928: r. McKay called on this bank and interviewed Mr. Kasten,
President. Borrowings were occasioned by heavy commercial and collateral loan
demand; deposits off; country bank balances low; expect a very substantial
reduction in borrowings before the first of the year.
Jan. 30, 1929: Mr. Kasten, President, called at Governor McDougal’s
request. He expects to be out of debt soon and will do his utmost to avoid
continuous borrowings in the future.
Feb. 23, 1929: Governor McDougal wrote regarding the Board*s published
state, ent.
Feb, 25, 1929: Reply received from bank promising co-operation.
Mar. 20, 1929: Governor McDougal conferred with Mr. Kasten over
tie telephone. Mr. Kasten stated, Hnave been unable to reduce borrowings because
of loss of four millions in deposits.1*
Mar. 21, 1929: Governor McDougal re ruested Mr. Vogel, our director,
to call on the bank urging a reduction of borrowings.
Apl. 23, 1929: Mr. Dreher, Vice-President, called on Mr. cKay
and stated that they were endeavoring to reduce collateral loans. Thinks loan
demand has reached tne peak; continued heavy coromercial demand. This call
was made at our instance.
Collateral Loans are Reported as Follows:
March 27: To brokers and dealers in New York
To brokers outside of New York
Collateral loans to others
$
0
3,000,000
32,600,000
M
u l
B iM m wm ■ •
-3 -
May 1: To brokers and dealers in New Tork
To brokers outside of Hew York
Collate!*' 1 loans to others
$
0
1,047,000
34,000,000
Comparison of the above s uowin. s indicate triat between March 27
and May 1, total collateral loans have been reduced £1,600,000.
At one of our Executive Committee meetings, Mr. Vogel reported that
he had called on this bank in response to Governor McDoug l's request and had
seen Governor cDougal's correspondence and learned of Governor vcDousl'a
personal taJLks with officers.
r. Vogel stated that in his opinion, every
reasonable effort had been put forth from this office to accomplish desired
results.
Our own opinion is, in regard to this particular institution, that
the proceeds of its loans on collateral have not been unduly used for
speculative purposes. The officers of the bank report an unusually heavy
and continuous demand for legitimate commercial purposes, and that they have
in many cases requested and received collateral on already existing loans.
But for this procedure, their loans on collateral to others would have shown
a considerable decrease.
We are convinced that in this particular case, the institution is
endeavoring in good faith to co-operate with us and with the Federal Reserve
Board in its effort to avoid the granting of credit to be used for speculative
purposes, and to effect reduction of any existing loans, the proceeds of which
may have gone into speculation,
3.
PEOPLES .;AYNK COIOTY BANK. DETROIT, MICH,
For the year 1928, this institution was out of our debt each month
except June, July, August, September, and December. Its higjh point o r
borrowings was $20,500,000; its average borrowings $6,300,000,
For 1929, borrowings have been continuous, the high point b#Ing
$18,250,000, with present borrowings $4,OX),000, These borrowings at iiraee
appear to be high. In tuis connection, however, it gaould be borne in mind
that the t>tal footings of tne bank are $300,0 X),000 and sometimes larger.
Our contact with the bank in connection with continuous borrowings
has been es follows:
1928: Our records show at least four different occasions on which
our Detroit Manager was Instructed to confer with the institution regarding
its borrowings,
Feb. 21, 1929: Mr. McKay advised our Detroit Manager tuat inasmuch
as the institution was already owing us and already held a very large amount
of Governments, it was inadvisable to loan them for the purpose of increasing
Government bond holdings.
Feb. 23, 1929: Governor vcDougal wrote regarding the Federal
Reserve Board's published statement.
Feb. 28, 1929: Detroit >anager advised that increase in this bank's
borrowings wts occasioned by loss of deposits ?.nd commercial demand.
Federal Reserve Board.
-4 -
Mar. 23, 1929: Mr. McKay advised Detroit 'anager in substance
as follows: "Are glad to lend t As bank for commercial demand, but additional
require ments for tuis purpose should corao from liquidation of collateral loans
and investments. Local b^nks saould not lean upon this institution continuous
ly for credit when they nave sec >n ;.ary reserve of bonds.H About the same date
Governor 1cDougal visited Detroit and conferred witn President Julius H.
Haass.
Collateral Loans are Reported as Follows:
March 27: To brokers and lealers in New York
To brokers outside of New York
Collateral lorns to others
May 1:
To brokers and dealers in New York
To brokers outside of New York
Collateral loans to others
$
0
8,500,000
39,600,000
$
8,800,000
38,000,000
Comparison of the above showings indicate that between 'arch 27 and
May 1, collateral loans were reduced in total a little over $1,000,00 ).
Tae trend of this bank*s borrowings at present is downward, and we
exject them to be entirely out of our debt in the near future.
Particular attentim is called to a letter from our Detroit Manager
which is quoted in connection with comments on the First National Bank in
Detroit, appearing immediately below.
4.
FIRST NATIONAL HANK, DETROIT. MICHIGAN.
For the year 1928, the borrowings of t As institution were continuous
since early in January; uign point S21,45o,000; average borrowing $9,$00,000.
For 1929, borrowings were continuous except for eleven days in
January; high point $18,950,000; present borrowings $11,300,000.
Our contact witn tnis bank in connection with continuous borrowings
has been as follows:
.
1928: Our records indicate nine different occasions on widen the
institution has been written to or conferred witn in regard to its continuous
and large borrowings, collaterrd lo nst the call money situation, etc.
Jan. •9, 1929: Detroit ian«ger advised tnr<t bank had liquidated its
indebtedness.
Feb. 23, 1929: Governor cDougal wrote regarding Federal Reserve
Board*s published statement.
Feb. 28, 1929: Bank's re; ly assuring cooperation.
March 8, 1929: Governor McDougal interviewed Hr. Douglas, President,
and received his assurance that borrowings would have the careful consideration
of the entire board of directors.
March 25, 1929: Governor 1cDougal met with the board of our Branch
urging liqui .^tion of neber banks* borrowings.
April 24, 1929: Governor cboual again conferred wit > r. Douglas,
President.
Federal Reserve Board:
-5-
Collateral Loans are Reported as Followsj
kterch 27: To brokers and dealers in New York
To brokers outside of New York
Collateral Loans to Others
May 1:
To brokers and dealers in New York
To brokers outside of New York
Collateral lo>ns to others
0
4,300,000.
28,700,000.
$
247,000.
3,800,000.
32,000,000.
Comparison of tne above showings indicates an increase in collateral
loans between March 27 and 'ay 1 of approximately £3,000,000.
On April 4, the following -rppears on tne records of our Executive
Committee:
rtSpecial consideration was given t) the member banks wno are large
and continuous borrowers, the borrowings of the First National Bank of Detroit
being given more than ordin ry consideration. Mr. Six™son moved that we state
to the First National Bank of Detroit that our Executive Committee has been very
much disappointed by the increase in their loans, as well as in tue continuity
of their borrowings; that we insist that their loans be materially reduced to
the end that they get out of debt within a reasonable time; tnat such measures
be adopted as may be necessary to accomplish this, and that if a reduction in
their borrowings cannot be accomplished without- tne sale of their bonds, we
recommend to the bank's board that they consider the sale of such securities.*
There ere five members oi* the Correriittee present, and r. cKay, who
represented tne Governor. The vote on this expression was unanimous.
This expression was transmitted to the board of our Detroit Branch
with the request that t iey convey the expression to tne brnk in question.
The following appears in the minutes of our Executive Committee .
meeting of April 12:
"Upon due consideration, it *.is moved by Mr. Simpson that the officers
and tne board of directors of the First National Bank of Detroit be informed
toat our Committee is not satisfied with the reduction m;>de to d te; that
means should now be adopted to hasten liquidation, and that in our opinion,
the situation justifies the sale of bonds; furthermore, that the bank *g*in be
informed that we snail expect it to adopt whatever plans may be necessary to
bring about complete liquidation of its indebtedness, and in the future adopt
a policy which will enable it to operate within its own resources for a good
part of the year, resorting to the use of Federal reserve credit only for
seasonal and emergency requirements,••
The records show this motion duly seconded and carried, and it was
transmitted to the Board of our Detroit Branch with the instruction that it be
in turn conveyed to toe First National Bank of Detroit.
On May 8, a tentative program was submitted by Governor UoDougal
Federal Heserve Board.
to our Detroit lan ger for transmittal to the First National Bank of Detroit,
calling for liquidation of borrowings by June 1, or before if possible,
substantial reduction to be effected each week from now on. Our Detroit Manager
had already indicated that tne First National Bank expected to reduce its
indebtedness to £9,000,000 by the end of tne current week.
Permit me at this point to call attention to another phase of
this particular situation. X quote from tne National Bank Examinees report
as of December 7, 1928, as follows:
“There are, in nqy opinion, only two matters of importance on which
comment can be made. One is the rather considerable amount the bank is borrow
ing and in that respect the length of time it has been in the borrowing class
is the principal feature. The bank has been borrowing money continuously for
many months. The necessity to borrow by all of tne banks in Detroit is rather
unusual, and I went into tuis examination xitn the idea that possibly the
borrowing was caused by stock market netivities on tne part of customers or,
perhaps, because of a loss in deposits. I found that neither one of these
reasons applied. The de-oand for funds by the bank* s customers, and, in
fact, throughout the city, has been inordinrtely heavy, but so far as I am able
to determine in this bank, that demand has been a legitimate one, legitimate
in the sense that the money was used in established businesses, with only a
few exceptions here and there.11
I
Detroit Branch:
now quote a letter received this morning from the Manager of our
“Dear Mr. McDougal:
Confirming out today*s telephone conversation, I called on our
director, Mr. Julius H. Haass, this morning to discuss with him some of the
points that we talked over when I was in Chicago yesterday and particularly the
matter of working out a plan of liquidation in connection with the First National
Bank, Detroit. I permitted Mr. Haass to read a copy of tne Federal* Reserve
Board's letter of Fay 2nd, 1929, which was addressed to Mr. Heath and when he
saw the name of his bank listed among t lose criticised as more or less continuous
users of Federal Reserve credit, he became greatly incensed and was determined
to resign as a member of our board. He stated that he resented suen criticism
in view of the fact that he is earnestly doing his part to bring about, without
injury to the good business of Detroit, an early liquidation of the borrowings
of Detroit banks. I called attention to the fact thr>t I was talking to him as
a director of the Detroit Branch and not as President of the Peoples Wayne
County Bank and wanted to discuss a plan of liquidation for the First National
B&nk. 1r. Haass stated he was convinced that the First National was doing
everything in its power, consistent with the best interests of business and for
tne good of that institution, and feels that it would be a mistake to demand
complete liquidation by the end of this month. He has talked with both Mr.
Clark and Mr. Cray very recently and believes that with the effort the bank is
putting forth they will be out of our debt within a reasonable length of time.
Federal Reserve Board.
-7-
"Mr. Haass called -ay attention to a statement made by Governor
Young in San Francisco with respect to the use of savings deposits in tne
Twelfth Federal Reserve District for the pure: se of securities, which had
resulted in the reduction of deposits of approximately $100,000,010 luring the
last 90 days. He felt that a statement auca 3 t ds sight .nve a very bad
effect on the public generally by putting into tneir :in s tne witndriwal of
savings deposits for such a purpose. Up to t ie present time, however, this
practice h s not been resorted to in Detroit.
I snail endeavor to see Mr. Dougl s, President of t ie First National
Bank, tomorrow and will write you with respect to my interview with him.
Very truly yours,
(Signed) Wm. R. Cation, Managing Director.*1
There are, probably, not to exceed twenty-five banks in this district
beside those specifically mentioned in the Board*s letter, which we have under
special observation, ie ore endeavoring to deal with each case in a manner which
tne particular circumstances sees) to warrant, and I think that the comments on
the four banks specifically remarked upon in tne Board*a letter and in this
reply* will indicate in a general way the manner in which we are proceeding.
The Board*8 letter, to which this is a partial reply, will be presented
at the next regular meeting of our Executive Committee.
Very truly yours,
(Signed)
.. A. Heath,
Chairman.
a 0 F Y
1
TO EE'iL ADVISORY COUTCIL
Office of the President
38 Scuth Dearborn Street
Chicago,
May
7,
1929.
Dear Mr. Platt:
I
found your letter of April 2 7 upon my return to the
office yesterday. In the resolution adopted by the Federal
Advisory Council on February 15, 192°, the Council in its state
ment "correct the present situation of the money market" undoubt'
edly meant that it desired the rediscount rates to be such that
they would be either equal to or higher than the rates charged
by the member banks to their choice customers.
In recommending "that the Federal Reserve Board per
mit the Federal Heserve banks to raise their rediscount rates
immediately and maintain a rate consistent with the cost of
commercial credit" the Council desired that the rates be such
that it would be inroossible for member banks to borrow from
Federal Heserve banks and lend out such borrowed sums atT a
profit. The Council also feels that it is highly desirable to
avoid the inconsistancy which existed a year ago between open
market operations and the prevailing rate on acceptances, and
in a reverse way is equally bad now.
I
trust that this will answer your inquiry and make
plain the views of the Council.
Very truly yours,
(signed) F. 0. Vetmore
*
President.
Mr, Edmund Platt, Vice Governor
Federal P.eserve Board,
Washington, D. C
VO LUM E 1 9 5
PAGE
58
FEDERAL RESERVE BANK OF ST. LOUIS
May 8, 1929.
Federal Reserve Board,
Washington, D. C.
Gentlemen:
I beg to acknowledge receipt of your letter of May 2nd relative to the
use of Federal Reserve credit by member banks having loans to brokers and
dealers in New York and brokers and dealers outside of New York.
Governor Martin has had personal interviews and has been in touch with
the officers of a number of the member banks having such loans, and he feels
that there is a spirit of cooperation on the part of these gentlemen with the
policies of the Federal Reserve Board, and a considerable reduction in the
amount of such loans has been made.
Regarding the three banks specifically mentioned in your letter - viz.,
First National Bank in St. Louis,
Mississippi Valley Trust Company, St. Louis,
National Bank of Kentucky, Louisville.
The First National Bank of St. Louis, wnile it still has loans to
brokers and dealers in New York City, has not been under rediscount with us
since April 23rd, except for $500,000 on May 3rd, which it immediately paid
up and now hrs no rediscounts with us.
The Mississippi Valley Trust Company, which had $3,800,000 borrowed from
us on February 6th, has been entirely out of debt to us on the following
dates:
February 8th to February 12th inclusive
February 14th
February 18th to February 25th inclusive
March 5th
March 7th to March 16th inclusive
March 19th
March 21st to March 22nd inclusive
April 25th to April 30th inclusive
May 2nd
It rediscounted on May 3rd, $800,000 and increased that amount until on
May 7th it was $1,700,000. During this same period its total loans have
decreased, its total investments have decreased, and its deposits have
decreased. Its loans to brokers and dealers in New York on May 1st were
$77,000, and while loans to brokers and dealers outside of New York and to
others have increased, we believe that the President is sincere in his
VOLUME 195
PAGE 59
'
Federal Reserve Board
e ffo r t s to cooperate with the Federal Reserve Board, and i t se.-.jg
the above record confirms the fa c t tnat he i s
king an e i :o r t .
to us tnat '
The National Bank of Kentucky at L o u isv ille presents : l i t t l e d iffe re n t
picture in that i t hrs suffered a very real lo s s in dep osits.
Between
February 6t and ay 1 s t, 1929, th is lo s s am runted to 13,60U,000, On May
1st i t wa3 borrowing from us $ 9 ,8 4 2 ,0 0 0 snd Government bonds i t hud on hand
that date amounted to $ 9 ,5 8 1 ,0 0 0 .
I t could pay o f f i t s rediscounts with
us i f i t would s e ll i t s Government bon s, but i s very lo t to take the lo ss
the sale of these bonus would n e ce ssita te .
ills bank has i d no loans to
brokers and dealers in * ew York City since
srch 1 » 1929.
I
f e e l that the members of toe Board of directors of the Federal Reserve
Bank of St. Louis are most w illin g to comply and cooperate with the policy
of the Federal Reserve Boord.
VTqcry
truly yours
(S)
Rolla ¥/e l l 9
Gnairfoan of the Board
COPY-
(COPT)
Federal Reserve Board,
V.ashington, D. C.
Dear S ir s :
The Federal Reserve Board’ s le t t e r o f May 3 , 1929, on the subject o f the use
o f Federal Reserve credit by member banks, was presented at the meeting o f
our Board o f Directors today and given the most careful consideration. I t was
VOTED that the Governor and the Chairman be instructed to
confer with the executives o f such banks in th i3 d is t r ic t
as in th e ir opinion may come within the scope of the Board’ s
le t t e r o f May 3 , 1929, presenting to them said le t t e r
and getting th e ir opinion as to the best method o f
dealing with the subject as i t bears on th e ir particular
situation and on the d is t r ic t as a whole.
I shall hope to send to the Board in the near future the re su lts o f these
interview s.
'Hie analysis of the situation in the New England District, a s set forth
in the Board's le t t e r , does not f u l l y picture the situ ation that has
developed in th is d i s t r i c t . During the la s t year member banks in th is
d is t r ic t have lo s t somewhere from one hundred and f i f t y to two hundred
m illions of d o lla rs o f d e p osits, and they have been faced with the situ ation
o f liquidating bond accounts. In your analysis there is an increase
shown o f $18,000,000 in investments. This increase i s due e n tire ly to
the fa ct that one of our large Boston banks over-subscribed to the extent o f
some $50,000,000 to Government bonds of one o f the recent issu e s, and
u n til about two months ago had loaned these bonds so that they did not
appear among th e ir investments. They have recently been obliged to
take these back, and i f i t were not fo r th is particular transaction the
investment account, instead of being Increased # 1 8 ,0 0 0 ,0 0 0 , would have
decreased # 1 2 ,0 0 0 ,0 0 0 . The executive o ffic e r s o f th is bank have
invariably taken up with any member bank any apparent misuse of reserve
c r e d it, and invariably the member bank has adjusted i t s situ ation or
has s a tis fie d us that the use o f reserve credit was ju s tifie d * •
*
I am,
Voura Very t r u ly ,
Frederic H. C urtiss,
Chairman o f the Board.
VOLUME 195
PAGE 6l
C"PY-
May 7, 1929
Federal Reserve Board
Washington, D. C.
P ear
S ir s :
I
beg to acknowledge receipt of the le t t e r of the Federal
Reserve Board of May 3, settin g forth in det i l an analysis of
the member bank situation in th is d is t r ic t as of A pril 24 com
pared with February 6, and referring to certain of the member
banks who have not affected any substantial liquidation of
their security loans since February 6. I have had made a care
fu l analysis of other banks in th is d is t r ic t that might appear
to be in the same general c la s s , and I w ill present the names
of these banks, together with the Board's le t t e r , at the
meeting of our Board o f D irectors to be held tomorrow.
I
w ill advise the Board a fte r our meeting tomorrow ju st
what procedure our Board o f Directors deems advisable to
be taken in tn is matter, or whether there i3 anything in tne
situation which makes an adjustment undesirable from the
point o f view of the public in te r e st.
Yours very truly
(S)
Frederic' H. Curtiss
Chairman
*■
V
/
J, 1.1 -:Jm
vft^rvt
iftderr
■iT 1,
Gftntlf* "hw J
r b oa rd o f iirweto r » t0 1&^* dX oCU03<
t ie sub fe o t r * V ies Of t-J.-ay '* ernl d e S<*rv©
Grjy 3rd with re if.e c t t o li*!**4.v0 in t ill in -U 9
'O o r 1 tss, continraou&ly frxa tu 4 3
1 •
which h ? v e , fctf. t>«rentlyf n ot &f twoted ny
tdoir A i K?trity lo « 'ns oin10# Fe bru ;ry 1kith*
jjfci i n d o t; 11
I b iii'.+ ’ i
v* Z Ci-X'i J J i i Z
»nic
Xi
7n Of
trve t>«<9n brio*-
T&® Governor of our I'^nk'v»r# ro-:ju08 tfti by - w ^ "•*vu to e ,;.t,Xfue
t * efforts >t Vi* opwrrtlv® officer* wild i vl*7«r to sparing frira
r.esbsr V-nks that full
ration vita >'4UnJt roawrv* A i c> *i*l
■itw;is which ic d*aired
too Federal Kooorvo avjr.i, ’iic Govern r
infor ,ci tne -boord tftnt he would trlto the Mtt«r up In t, cyk. r .
t^t-nxf * x ‘raorir:l re:.reawat'tion wherever j
cable, wlt^ tuo** br.ni.»
in this Uetriot w itch or© Hated in the fader*! aeaarve Boar*** t
letter of ,y 3rd end with.such oiue* bulks in id© distriat n& w-ay j
> * r tc
jithuoldiiy.- th? t full 00 iteration r^-’uootod by the
1 Rwaarte Bo®rd in it* statements of laat F<ibru«r%..
V®r> truly yours,
(5) f• *
'
!• 'ioxt >nf
*X
■>
V/--
c opi
VOLUME 195
PAGE 62
-
*1
’•
\
.
FsaernX iioserve A^otifc an:
Onnir.uvn of tn* Board,
f
fc
Federal Reserve Board,
Washington, D. G.
Sirs:
T *e letter from the Federal Reserve Board dated May 1, 1929, referring
to trie borrowings of certain member banks in tnis district and suggesting
certain metuods of procedure with respect thereto, ias been considered by the
board of directors of this bank.. At tneir meeting yesterday they instructed rae
to advise you of their unanimous views.
In my letter of February 21, 1929, I reviewed in considerable detail the
various steps t.dcen by tnis bank in endeavoring to prevent any abu^e of its
facilities by its member banks. I outlined what has been and still is its pro
cedure in dealing with member banks which are considered to have been in our
debt too continuously or in too large amounts, or wita banks w.iich are consider
ed to be borrowing not because of any economic conditions in tae community which
they serve but solely bee use of some voluntary investment policy designed only
for a profit.
While we have received no reply from the Federal Reserve Board to tnis
letter, we have been informed from time to time in conversations with members
of the Board not only that they were in agreement witn tae policy which we
have pursued for a considerable time but also that tney considered that we
iad done all that was proper in discouraging individual member banks from
abusing our facilities.
The Federal Reserve Board's letter of May 1 lists a number of member banks )
which they believe to be indicative of a group of banks that are uncooperative *
with the efforts of trie Federal Reserve System. The officers and directors
have carefully watched the borrowings of all of these banks and heve dealt with
tnera in accordance with the policy outlined in our letter of February 21, and
with full consideration of tneir individual requirements in relation to our own
problems. We shall, of course, continue our policy with respect to these and
other member banks. On the waole, however, with possibly one or two exceptions,
the principal member banks in tnis district have given satisfactory evidence of I
their cooperation with the efforts of this bank.
The Federal Reserve Board's letter of May 1, in effect, requests us to
i
folios some different procedure or to put still further pressure upon member
banks to repay their borrowings from the Federal reserve bank. It seems clearly
to imply that we snould apply ? stricter criterion as to tae propriety of member
banks' borrowings than that which we have set forth in our letter of February
21, and predic tes its re ;uest for a readjustment of the position of banks which I
have been borrowing from us continuously or frequently upon the fact that they
are "carrying a considerable volume of security loans." In other words, the
)
letter indicates that a test of "abuse" of Federal reserve credit is to be the
VOLUME 195
PAGE 63
amount of the »ao
a &<*n-r;il banking business must nec»3& r i l y
Every bank in the country ciol
«fire 1c•n9 on secaritie ». *rue i c • t,no c o u n i 1s le.it i;aste basin ess is inducet
by that method. To I
fch? b a dmAc* s ri
>orra
i
■
bank on eligible paper is prejudic'd by vhs ere i*ct tu- t it ii,'.s :.&de loans on
securities f ils, it seems to us, torch -nlv.e
conditions. The question
whether security lo no ore or a r e nit sp^cul -l i v e I ? o
•v>iicn
l " assible of
deteradnat1on even
. It is me*.. let* reveille by tne Federal
reserve bank. ,e
>ati <ri whetaer the federal reserve thunk i»
rl< ht to
deny accommodation to a 10 iber brnk s >lely on these grouuus provi led tue Taember 1bank offers eligible paper for U sc unt to r«;»dr its reserves.
J
We believe 3
of 5 nnl& pU3
tne Federal Reserve Act to
establish a credit system t*i»t would oe ^ insurance so t u country .g a in it the
evils' of those money panics which h^vc -Iv-.y; fallowed in p at ye rs when uuney
B unavailable. It bay be felt t at it is pet so serious if, in other cities
ir ot ncr sections of the c wintry, neriber dui* h rr< re tired by direct ■ction to
linuid-te loans in order to
: off tn e •■'ederal reserve ’
bank. In such cases
recourse to the oou »try1a principal
rket in Rea York hat always been
possible as r back-log. But, if becruae >f any policy ir procedure of the
federal Keserve Bo.-u*d >r ’
reserve bank, weeibl tanks suould be led
V> believe fchr-c Federal renerve- credit it unobt; in; bit? ir this market ot our
/
;Iscom t rate, one of the chi f rorposes of the Federal deserve Act -will have
been defeatee, ublio confidence impaired, and the usual auverse effect u.on
business .
• . .-rest eriby invi ' . «
If,, ir < e oi il i ^86 conditions, >ve should no* t k<* those farther steps
Ai*tr,.r b 1:, ..o rd in dealing wltr individual member banks in tvis district,
we l lk vs t. ct io matter now c .refully er lained,they would be regarded subatanttally s cl vaint- our 1
La j( with e view'of rationing credit. This, we
bell^ve, :rd at of itself proiuce a condition which
cannot afford to risk.
,3ur directors a Ve noted tne ho-rd* s r-quest that they co omioio^te with fc.^
member benks listed in its letter, in such ways r.a tuey may daer most suitable,
in an effort to bring such member banks into effective cooperation in adjusting
tneir positions. They desire use to state tiat.in their judgmentwho most suitable
way of doing t .ir, apart fr-«n the uestion of th« discount r 'e,is to contixsue tne procedure th t has been Ioil owcfL by ^ivlo u y<
■$ outlined in*?tyletter oi
Febru ry 21, believin la t to oat any
r«
r
( r li
serious consequences.
v
.
Very truly yours,
(3)
<r*.te«
.
c'larra *,
Chf-ir ;hi.
kaY.
/
C O P Y
May 10, 1929.
V-
Dear Mr. Plattt
At the meeting of our directors yesterday afternoon, prior to
the vote taken to establish a rate of 6 per cent subject to the review
and determination of the Federal Reserve Board, there was still further
discussion of the various factors which, in the minds of the directors,
make an increase in our rate nedessary.
The directors expressed themselves as being in agreement with
the statement in the B0ard*s letter of May 1, that the Federal Reserve
System owes it to the country and itself to put its house in order to meet
the credit needs arising from crop harvesting and moving which m 11
begin in about three months. They pointed out that it was partly for
the very reason that the Board has emphasized that in their earnest
effort to correct present conditions as quickly as might be possible, the
directors of this bank have urged upon the Federal Reserve Board the
need of an increase in our discount rate since February 14. The increase
la tho rat® by itself might not immediately accomplish the purpose but
as a supplement to all the other effort* that have been, and will continue
to be made, it will expedite the accomplishment of that purpose. The
delay in increasing the rate, in the judgment of our directors, has only
-bn** correction or tH© conditions, the importance and urgency of
which the Board, in its letter, asks us to impress upon our member banks.
If thd amtter is so urgent that there must be no unnecessary delay in
bringing about reeded correction, then might it not be assumed that the
experiment of direct action without rate action during the past three
months, has by itself failed to accomplish the desired results, and that
rate action, even now, should be added to our other efforts to correct
the situation. As we have repeatedly stated, time now seems to be
the essence of the problem.
Very truly yours
(Signed) Oates W. McOarrah,
Chairman.
Honorable Edmund Platf,
Vice Governor, Federal Reserve Board,
Washington, D. C.
VOLUME 195
PAGE 64
\
SUBJECT!
Board1# letter of May 2, 1929, on the subject of the use of
Federal Reserve credit by member banks, etc.
Federal Reserve Board
Washington, D. C.
Gentlemen:
At the regular meeting of our Executive Committee held today, the above
letter was presented and read in full.
My letter of May 7, intended as a preliminar y or partial, reply to the
x': 5r-.rc *s letter of May 2, was also read in full.
Both letters were discussed quite fully.
I was instructed to advise the Board that the Executive Committee is in
full record with my letter of May 7; also, that furtner careful consideration
will be ^iven to the Board*s letter of May 2. The Committee members present
expressed the opinion that our operating officers are handling the situation
in a proper and efficient manner, and that if at any time it appears that
additional procedure is necessary or desirable, our Committee will not
hesitate in insisting that such steps be taken.
The Committee was advised that the First National Bank of Detroit nad,
at the close of business last night, reduced its indebtedness to $8,900,000,
or $100,000. more tnan had been promised.
The following expression from the Executive Committee of our Detroit
Branch was also read and made a matter of record, five members of our Detroit
Board having been present when the action was taken:
“In tne face of an unusual demand for legitimate commercial
credit, tne Committee is satisfied that the Detroit banks have handled
the situation as well as they possibly could and are doing all they
can to work in cooperation with the policy outlined by the Federal
Reserve Board, keeping in mind the best interests of business. The
Committee also believes that it is not desirable to force the sale
of Government securities at t iis time, under the present conditions.
Members of our Committee commented on that paragraph of the Board*s letter
which reads as follows: “The Federal Reserve System owes it to the country
and to itself to put its house in order to meet the credit needs arising from
crop harvesting and moving waich will begin in about three months, and which
will be accompanied by the usual autumnal increase in trade.** Different
members of the Committee commented on the fact that this institution appears
to have already put itself in position to care for such seasonal requirements,
VOLUME 195
PAGE
65
/
*
attention to the fact that the reserve percentage of this hank was on
Way 8, 85.4, as compared with a total for tne System of 74.3 on tie same date,
and a reserve of only 71.3 3 aown fcy this institution on the corresponding date
of last year, however, for several years past, demands on tills institution
for croi -moving purposes in the >>11 have not been excessive.
Galling
Each member of the Committee present expressed himself as regretting tnat
the Federal Reserve iicard has disapproved our repasted action favoring an
increase in our discount rate, believing that such increase at this time
would be a most valuable aid in securing the effect desired by both the Federal
Reserve Eoard and our own board of directors.
Very truly yours,
(S) W. A. Heath,
Chairman.
• COPY- -
\
FEDERAL RESERVE BANK OF SAN FRANCISCO
May 10, 1929.
Dear Sirs:
At a meeting of our Board, of Directors,
held May 9, the Federal Reserve Board*s letter of
May 2 was read and discussed. The Chairman and
the Governor of tnis hank were authorized by its
Board of Directors to take waatever steps they
deemed necessary to improve the situation in the
district to which the Board directed attention, and
were directed to prepare a reply to your letter for
submission at the next Directors* meeting wnich will
be held on May 16. Immediately thereafter, I shall
communicate the findings of our Board of Directors
to you.
Yours very truly,
(S) Isaac B. Newton,
Chairman of tne Board.
Federal Reserve Board,
Washington, D. C.
VOLUME 195
PAGE 66
4.
McGarrah to Federal Reserve Board, May 10, 1929:
Acknowledges receipt of letter of Board dated May 1,
1929, and states that “by his letter of February 21, 1929 he reviewed
in detail the steps taken by his bank in endeavoring to prevent any
abuse of its facilities by its member banks.
I
outlined what has been, and still is, its procedure in
dealing with member banks which are considered to have been in our
debt too continuously or in too large amounts, or with banks which are
considered to be borrowing not because of any economic conditions in
the community they serve, but solely because of some voluntary
investment policy designed only for a profit.
(See letter in files)
h
V
VOLUME 195
PAGE 67
*
A
I
.** I
F&DKHAL RESERVE BANK OF ATLANTA
May 11, 1949
The Federal Reserve Board,
M^sain^ton, J . C.
Dear Sirs:
Under date of May 7th, I acknowledged receipt of your letter of May 2nd,
In which you reviewed banking developments (as disclosed in the statements *
of condition of 592 reporting banks) since February 5th.
In ray letter of May 7th I called your attention to ratio of loans on
securities by reporting banks in this District to total loans since February
6t •, ni to percentage of decrease of lo ns on securities by reporting member
banks in tuis District from February 6th to April 24tn.
In ray letter of May 7th I briefly reviewed the situation in our District
relative to loans by borrowing member banks to brokers and dealers in New
York
V
w U
•
I
stated in ny letter of May 7th that your letter would be submitted to
our Directors at our meeting on May 10th and I would make further report to
you.
On yesterday our entire Board attended our Board meeting. In addition
to our Board, we and the pleasure of having with us Mr. George R. James, 'of
ymr Board, and Mr. J, p. Butler, Member of the Federal Advisory Council
representing our District.
fSSt
"r
Your letter was submitted to-.the consideration of our Board and my letter
to you of iay 7th was considered in connection with your letter.
A very full discussion was had as to the situation in this District, both
as to loons by our member banks to brokers and dealers outside of our District
and to loans made upon securities by our member banks, including such loans by’
the banks which are not borrowing from us and banks which are borrowing from us
Information was given on the question of loans within our District by
each member of our Board who was informed as to the special conditions within
the community in.wnich he resided. Mr. H, Lane Young discussed tne question
with respect to Atlanta and Savannah; Mr. Simon with respect to New Orleans*
'r. Melvin witn respect to Selma and the suitrounding part of Alabama; fir. Wars
with respect to Florida; Mr. Kettig witn respect to Brimingham; Mr. Lea with
respect to Nasnville, Chattanooga and Knoxville. The information obtained
from these different Directors was not as specific as we could have desired
because copies of your letter of May 2nd, which I had sent to each director
noa reached t em only a short time before they had left their homes for our*
meeting, and we hoped to get more direct information from these Directors
with respect to the situation in their communities.
VOLUME 1 9 5
PAGE 69
Federal Reserve Board.
We were fortunate at having at our meeting Mr. Butler, who is the Member
of the Federal Advisory Council and who also happens to be President of the
Canal Bank and Trust Company. We felt that his presence was especially helpful
at the meeting in view of the fact that your letter of May 2nd had specifically
named three New Orleans banks.
Mr. Butler had received a copy of your letter
only a short time before he left New Orleans for our meeting but he had
investigated tae situation thoroughly in his own bank and as thoroughly as
he could with respect to the other two hew Orleans banks end the situation
relating to the security loans in those banks, and in his discussion covered
the general condition in New Orleans which had made necessary continuous borrow
ing by the New Orleans banks.
It is my purpose to pursue this subject further, and to furnish you with
more specific information relating to the three New Orleans banks and the banks
at other points in our District and I, therefore, would not at this time write
you in det-il information furnished us by Mr. Butler. It is fair to say
that relative to the three New Orleans banks r. Butler made a very fair, frank
and full presentation. After nis presentation it was the opinion of all
present that the situation in New Orleans had been explained thorougnly and
satisfactorily, rand the New Orleans banks named in your letter were conqplying
with tne spirit of the policy of the Reserve Board and this bank with respect
to the proper uses of reserve credit.I
I
have been elected by the AtlantaPrecbytery as a Commissioner to the
General Asseinbly of tne Presbyterian Church and will be absent from this
office for about ten days, in attendance at the meeting of the Assembly.
While I am away my office and Mr. Black will endeavor to obtain more specific
information in order that I may report more in detail upon the New Orleans
situation, and the situation in other parts of our District, relative to the
subject matter of your letter of May 2nd.
Very truly yours,
(S)
Oscar Newton,
Chairmen.
Gentlemen:
I
atten led a regular meeting of the Board of Directors of the Atlanta
Hank yesterday. All of the directors end senior officers of the Bank, with
the exception of Deputy Governor Foster, were present as was also Mr. Butler
of the Advisory Council.
In addition to the regular routine of business the meeting discussed
at considerable length the so called "Present Credit Situation" and with
particular reference to the Board9s letter bearing upon the c o n tin u o u s or
frequent borrowings in this district.
tfr. Butler and Director Simon explained quite fully and frankly the
position of tne three New Orleans banks that were referred to in tae Board1s
recent letter and the officer of the bank made similar explanation as to other
borrowing banks.
I
was convinced that the borrowings were not for the purpose of making
or maintaining speculative loans or investments but were caused by, more or
less, local conditions peculiar to each bank. For instance the conditions
in hew Orleans are tne result of floods, crop failures, accumulated stocks
of grain, cotton and sugar, and otaer minor matters of local nature.
It was, I believe, the unanimous opinion of those present at the meeting
that very little or any reduction in borrowings of the member banks in
the district was possible before crops move. On the other hand the seasonal
borrowings must be expected.
ttvery one present was fully alive to the dangers of the excessive
speculation thrt is going on throughout the country and I aia thoroughly of
the opinion that the officers and directors of the Atlanta Bank, as well
as those of the member banks in the district, are heartily in accord with the
Board*• desire to prevent reserve credit being used in speculation and that
tie Board may expect the fullest cooperation.
Mr. Oscar Newton especially expressed gratitude at the Board*s action
in senaing the recent letter. He stated it was very helpful to the officers
in impressing on the member banks the seriousness of the existing conditions.
All of those present expressed regret that the aggregate borrowings of
the member banks should be in excess of the member banks* deposits for the
district but there is no doubt full justification for it in the unfortunate
locsl circumstances and conditions.
Federal Heserve Board
All of those present were opposed to raising the discount rate so far
as the Atlanta Bank and district is concerned. Severr-1 expressed themselves
as feeling that such action would be an unjustified and an unwarranted penalizing
of those member banks who borrow only to meet seasonal demands for crop
production harvesting and marketing. Undoubtedly an increase in rates would
be an addition to the already heavy burden under which the business interests
of the district are now being operated.
With the exception of Director Ware, who favored a “System* advance in
rates, all of tne others present were opposed to such action. However, the
opinion was unanimous that if the rate at New York was raised it would be
necessary to make an advance in the Atlanta rate.
While I am not very optimistic s to the business outlook in this section,
there is hopeful sign in the tendency on tne part of the people to get out
of debt. The folks generally, and especially the farmers, are working hard
and I know that this policy always stages a come-back in tne South.
I shall be in Memphis Sunday, Monday and Tuesday.
Respectfully
(S)
COHT -
\
Gteorge H. James
Proposed Reply to L etter of Chairman KcGarrah dated May 10, 1929,
y
By C.
Haiiilin.
X -^ 1
xus
•
1/
*
( C~4L4*LM4~4MJ
•
Hie Federal Reserve Board has directed me to acknowledge your le tter*
of May 10, 1929, in response to the B o a rd *s-letter of May 1 , 1929,
/
*
In th is le t t e r you state that your directors have dealt with the member
banks in the manner set forth in d e ta il in your le t t e r to the Board of
February 21, 1929 in reply to the Board*s le t t e r of February 2 , 1929, and
th at, with one or two exceptions, the member banks in your d is t r ic t have
given sa tisfa c to ry evidence o f th eir cooperation with the e ffo r t s of your
••
bank.
•
You s ta te , however, in your le t t e r that the Board, by i t s le t t e r of
May 1 , 1929, lias directed a d iffe re n t procedure from that set forth in your
l e t t e r of February 2 1 s t , and that i t lays down a d iffe re n t and s tr ic te r
crite rio n of the propriety of member bank borrowings, making such propriety
depend upon whether the membe r banks are carr ing a ‘'considerable volume o f
security lo a n s," thus laying down a new te st of the abuse of Federal Reserve
c r e d it.
You further state that such a procedure would be considered by the banks
*
to be a rationing of credit and might be productive of very serious conse
quences, and you add that, in your opinicn and that of your d ire cto rs, the
be st way to bring the member banks into more e ffe c tiv e cooperation in
_
)-
adjusting th eir p o sitio n , - apart from an increase in the discount r a te s ,-
VOLUME 195
PAGE 71
would "be fo r you to continue the procedure outlined in your le t t e r of
February 2 1 st,
You further c a ll in question the right o f your hank to refuse to
accommodate a member bank offerin g e lig ib le paper fo r discount, so le ly on
the ground o f the amount o f i t s security loans, although i t s nurpose in
obtaining such rediscounts is to make good i t s required reserves against
such loan s.
A
Die Board understands from the above that your directors seem to be
o f the opinion that the Board, in i t s le t t e r o f May 1 , 1929, has ruled as
a matter of lav; that a member bank carrying a Hconsiderable volume of
security loans*’ should be denied the rediscount p r iv ile g e .
Dae Board d irects me to inform you that i t did not make or intend to
make, - whatever i t s lega l powers may be, - any such ruling of law in i t s
le t t e r of May 1 s t , but, on the contrary, i t merely la id down certain princip les
of sound banking applicable to the present abnormal banking conditions in the
country, and that i t s references in said le t t e r and previous le tt e r s to the
reasonable claims of member banks fo r rediscount f a c i l i t i e s , should be con
strued as applicable to present abnormal conditions.
Dae Board stated in the Federal Reserve B u lletin fo r February, 1929, released fo r publication February 7 , 1929, -
that,when conditions are arisin g
which obstruct Federal Reserve banks in the e ffe c tiv e discharge of their
functions of so managing the credit f a c i l i t i e s o f the Federal Reserve System
as to accommodate commerce and business, i t is i t s duty to inquire into them
and to take such measures a.s may be deemed suitable and e ffe c tiv e in the
i
3
circumstances to correct them, which, in the immediate situ a tio n ,
.
means
to restrain the use, eith er d ir e c tly or in d ir e c tly , o f federal Reserve
credit f a c i l i t i e s in aid of the growth of speculative c r e d it,
^ne Soard- fe e ls that i t v/ould "be generally admitted that such obstructive
conditions are now in evidence, and that the references above quoted w ill
make i t clear that the Board1s le t t e r and statement were a declaration of
sound banking p o lic y , and not a ruling of law imposing a new te s t o f the
abuse o f Federal Reserve credit f a c i l i t i e s .
I t would seem clear to the Board that your directors so understood the
Board*s p o sition when you stated in your le t t e r of February 21st that they
were " i n f u l l sympathy with the Board in the objectives sought, and that
v^iey proposed oo do everything they properly may to cooperate in their atta in
ment."
I t may, however, be pointed out that the alleged new te st o f the abuse of
Federal Reserve cred it was promulgated in the le t t e r of May 1 s t , and that the
directors in tne le t t e r of February 21st were merely expressing their sympathy
with the p o lic ie s la id down in the Board1s le t t e r of February 2nd and the
published statement o f February 5 , 1929.
The
Board desires to state emphatically that i t did not intend to e sta b lish
any new p o licy in i t s le t t e r of May 1 s t , and that i
t
h
p rin cip les o f said le t t e r were the same as those underlying i t s
le t t e r s and
e
e a r lie r
i t.s statement above referred to .
Ihe Board would c a ll attention to the fa c t that the "ob stru ctive conditions"
referred to in the Board1s statement o f February 5th, grew out o f the fa c t that
there were many member banks who had been borrowing from the Federal Reserve
4.
oanks, fo r some time p a st, eith er continuously or so frequently that they
were in e ffe c t securing capital through their rediscounts and loaning this
ca p ita l la rg ely on speculative s e c u r itie s .
Ehe Board expressly disclaimed
any desire to interfere with the lawful practices of the member hanks so long
as they did not involve the Federal Reserve hanks, hut the Board fe e ls that
such frequent or continuous borrowing most decidedly does involve the Federal
Reserve hanks, and consequently i t called upon them and also upon the member
hanks to cooperate to remove these obstructive conditions.
I t should further he noted that while the Board, in i t s le t t e r of
February 2nd, uses the phra.se ” speculative secu rity lo a n s,” the Federal.
Advisory Council on February 15th construed th is reference to include « loans
based on se cu ritie s” and that a cony of this statement of the Council was
sent to every Federal Reserve hank.
fhe .coard believes that a b r ie f consideration of your le t t e r of
February 21st and i t s apoendices, w ill show cle a rly that the executive o ffic e r s
of your bank pointed out to your directors the danger involved in the alarming
increase in security loans to customers as w ell as to brokers, and that they
a lso pointed out the manner in which the banks making such loans should be
treated by the Federal Reserve bank.
For example, in the memorandum dated February 7 , 1929, attached to
your le t t e r of February 21, 1929, the follow ing appears; - ” Undoubtedly
c o lla te r a l loans cor buying stock exchange se cu ritie s have been o f importance
m bringing about the increased average borrowings of the banks throughout
tnis a i s t r i c t , and also in bringing about the increase in the number o f banks
■borrowing over six months.11
.Again fin your le t t e r o f February 2 1 st you sta te : - "In such cases
we usually indicate to the banks the reason fo r our p o sitio n and our
expectation that they w ill not borrow from us purely fo r p r o f i t , or to
obtain the equivalent o f ca p ita l funds to carry on business that is
otherwise too large fo r the amount o f th eir cap ital account.H
In a le tte r from Governor Harrison to Governor Young, dated April 9,
1929, Governor Harrison used the following language:
"The one thing which has prevented, and now prevents,
the restoration of more normal money conditions is a large
expansion o f the credit structure due la rg ely to speculation
in s e c u r itie s .
This credit expansion lias forced the System
to adopt firm money p o lic ie s , including three increases of
discount ra te s, the sale o f Government se c u r itie s , a r e str ic tiv e
b i l l p o lic y , and careful scrutiny of the borrowings of the member
banks."
In the same le t t e r Governor Harrison expressed the opinion that while
the continuance o f p o lic ie s o f r e s tr ic tiv e purchase o f b i l l s and careful
supervision over member banks borrowings alone may u ltim ately have the
desired e f f e c t , further steps should be taken along the lin e o f increasing
discount ra te s.
The banks referred to by way of illu s tr a tio n in the Board*s le t t e r
o f May 1 s t , and probably many others in your d i s t r i c t , were, in the opinion
o f the Board and in the language of your le t t e r of February 21st with
enclosures, banks whose "borrowings have been too continuous or have averaged
too much", and to quote further your words, - "These banks we re obtaining
the equivalent of cap ital funds" and were using these funds in loans on
speculative s e c u r itie s , and the Board, in i t s le t t e r o f May 1 s t , recuested
6.
jou
to
e-djust
take
up
the m a t t e r
with
these
hanks
with a
view
to h a v i n g
them
their position.
!2he Board does not consider i t s le t t e r of May 1st as imposing a new
te st fo r abuse of Federal Heserve c r e d it, hut merely as pointing out a
condition in these hanks "requiring careful scrutiny and careful supervision
o f their borrowings" -
to use the very words o f Governor Harrison in h is
le t t e r of A pril 9th quoted above.
Governor Harrison further says in that le t t e r , that he has already
explained the p o sition o f the Board to the principal Hew York City hanks in
order that they might cooperate towards checking the expansion o f the to ta l
/
volume of c r e d it.
that «3he above quotations show conclusively
that i t s le t t e r of May 1 st la id down no new te st of the abuse of Federal
Reserve cr e d it, but merely suggested the course of action which Governor
Harrison and your Board have stated was already the practice of your bank.
/
A
xiie Board in it s le t t e r of May 1 s t , whatever i t s le g a l power may be,
as aoove stated , did not request your directors to inform the member banks
that those carrying a "considerable volume o f speculative security loans"
would henceforth be denied the rediscount p r iv ile g e ; nor did the Board request
tnat these oanks should reduce the volume o f th eir speculative se cu±ity loans.
You were merely asked to confer with these banks to fin d why they could
not cooperate more c lo se ly with the e ffo r t of the Federal Reserve Eoard to
bring aoout some liquidation of the Federal Reserve credit which they were
using.
’
'
IMe .eoard* s le t t e r o f Hay 1 st might have been considered as having
/
accomplished i t s purpose in substance, i f these banks had liquidated a reasonable
7.
ajnoiuat of th e ir horrowings from funds in th e ir possession derived from the
0 < ~ 4 x ju >
W 1
r
<"sw a l
a •&
rri a m
f
t> £
•»»
■4-' <vt/s«
««4
^
^
4 ___
_
^
•
«
.
. a
-
y^withfteawaJ. ■»£ >*qnoy„ ggoH^jrnnl ntima, or from gold imports, without
liq u id a tin g aay of th eir customers* security loans.
!Ehe Board further fe e ls that while i t s le t t e r of May 1st m s s t r ic t ly
in accordance with the avowed practice of your "bank, i t regrets to perceive
tnat your directors apparently have rad ically changed th eir views from those
set forth in your le t t e r of February 2 1 s t.
In your le t t e r of Hay 10th you stated that, in your opinion and that
of your d ire cto rs, c o lla te r a l security loans are lawful loans; that i t is
impossible io r a member bank or a Federal Reserve bank to fin d what portion
o f these c o lla te r a l loans are speculative loans; and you f in a lly apparently
ta*ce the position that your bank has no right to deny accommodation to a
member bank o ffe rin g e lig ib le paper to restore i t s reserves s o le ly on the
ground tnat the restoration of these reserves was necessitated by an increasing
volume o f, security .Loans.
A
The Board finds nothing in e x istin g conditions making i t necessary, 7,ha Lever i t s le g a l powers may be, — to decide th is question at the present
oime, but would content i t s e l f with pointing out to you that such an opinion
on tie part o f your d irectors necessarily would seem to imply that a member
bank may oorrow from a Federal Reserve bank a l l i t p leases, provided i t is
w illin g to pay the established discount rate, free from any interference
on the part of the Federal Reserve Bank,
fh.e Board would point out tnat such a theory would seem o f necessity
to dirow into the discard a l l questions o f scrutiny, supervision, and d irect
3.
action or pressure.
The Board, has noted that in carrying out the p rin cip les la id down
in your le t t e r of February 2 1 s t, your bank nas apparently confined i t s
e ffo r t s to bringing banks to correct their positicn who were loaning on
c a ll in the New York market, although i t must also be noted that the
p rin cip les underlying said le t t e r of February 21st and the l e t t e r of Governor
Harrison, went very much farther than th is .
The Board also notes your statement that members o f the Board have
from time to time expressed agreement with the p o licy pursued by your bank,
and have considered that you have done a l l that was proper in discouraging
individual member banks from abusing the Federal Reserve f a c i l i t i e s .
The Board recognizes that as a whole sa tisfa c to ry resu lts have been
and are being achieved by your bank, and this was probably the reason fo r
the statements attributed by you to some members of the Board.
There was
nothing, however, in your le t t e r of February 21st to give the Board to
understand that the scrutiny and supervision which you stated was extended
to a l l the loans of the member banks who were borrowing too frequently, was
in fa c t, lim ited to scrutiny and supervision of brokers loans and not of
customers* loan s.
The Board is of the opinion that the frequent borrowings
of the banks cited as illu s tr a tio n s in i t s le t t e r of llay 1 s t , ju s t i f y a
c a ll fo r a careful scrutiny and supervision of a l l their loans on secu rities
whether to customers or to brokers, and in fa ct of a l l their other loans,
l e cving, however, to the banks concerned, in the f i r s t instance at le a s t , to
determine ju s t how they w ill adjust their condition to bring about more
9.
#
complete cooperation with the Board*s p o lic y .
I t is nardly necessary to add that the Board neither suggests nor
desires that you sh a ll approach these banks with any threat, open or
v e ile d , ofp refusing the rediscount p r iv ile g e , or any unwarranted in ter
ference with th eir management.
I t w ill only be necessary, in the f i r s t
instance at le a s t , to point out that th eir frequent borrowings are
accompanied by speculative loans of large volume, and that you hope and
believe
uhey w ill find some way in which to adjust th eir p o sition and to
bring i t into lin e with the Board*s p o lic y .
The Board fe e ls that i t w ill
be time enough to consider what it s le g a l powers may be a fte r a l l e ffo r ts
at mutual cooperation have fa ile d .
I t w i ll , however, state at this time
tiiat i t has oeen advised by i t s Counsel that i t s le g a l nowers are broad
enough to meet any situ a tio n , such as the present, completely and
d e c isiv e ly .
The Board requests that you read th is le t t e r to your directors at
the next meeting, and that a copy be sent to each director absent from
such meeting.
Kay 15, 1929,
Proposed Reply to Letter o f Chaiman McGarrah, dated May 10, 1929,
*
by C. S. Hamlin.
The Jfederal Reserve Board has directed me to acknowledge your two
le tt e r s o f May 10, 1929.
In the f i r s t le t t e r , you state that, in the opinion of your
d ire cto rs, the Federal Reserve Board has la id down a new te st of the
abuse o f Federal Reserve cre d it, namely, carrying ” a considerable
volume o f security lo a n s,” and that th is w ill be construed as a rationing
of credit which may be productive of very serious consequences.
ffiie Board directs me to reply that i t had no intention in said
le t t e r o f laying down any new t e s t , but merely emphasized the necessity
lo r cooperation between certain o f your member banks and the Federal
Reserve bank.
The Board, as frequently stated , does not consider i t one of it s
functions to regulate the Hew York Stock Exchange.
I t simply confines
i t s e l f to the use o f Federal. Reserve credit given to the member banks
through rediscounts.
I t considers also that mien a member bank continuous
ly or frequently rediscounts with a Federal Reserve bank, i t is re a lly
ootaining cap ital which is not in accordance with Federal Reserve p o lic y .
Your le t t e r o f February 1st sets out that when banks are borrowing
too frequently, you admonish them that they must not obtain the equivalent
of cap ital funds to carry on business that is otherwise too large fo r
the anount of their capital account.
Governor Harrison, in his l e t t e r to Governor Young, dated A oril 9 , 1929,
2.
said that the expansion of the credit structure due largely to
speculation in se c u ritie s, has forced the System to adopt firm money
p o lic ie s, including three increases of discount ra te s, the sale of
G-overnment se c u ritie s, a re s tric tiv e "bill p olicy, and careful scrutiny
of the borrowings of the member hanks.
I t was ju s t this careful scrutiny o f the borrowings of the member
v
t-
banks, as stated in our l e t t e r of May 1 , that the Board suggested you
undertake, as these banks, in the opinion of the Board, have been
“borrowing too continuously or have averaged too much” -
to quote the
V
words of your le t t e r of February 2 1 s t, and you were asked to confer with
them to fin d why they could not cooperate more c lo se ly with the e ffo r t
o f the Federal Reserve Board to bring about some liq u id ation of Federal
Reserve credit which they were using, and the Board fe e ls that you should
approach them in a s p ir it of mutual cooperation to see i f they can not
bring themselves into lin e with Federal Reserve p o lic y .
The Board notes your statement in your f i r s t le t t e r o f May 10th,
that the member banks in your d i s t r i c t , with one or two exceptions, have
given sa tisfa c to ry evidence of their cooperation with the e ffo r ts o f your
bank.
In your second le t t e r o f May 10th, you state that i f the matter
is so urgent that there must be no unnecessary delay in bringing about
needed correction, then might i t not be assumed that the experiment of
direct action without rate action during the past three months, has by
i t s e l f fa ile d to accomolish the desired r e su lts.
The Board sees some
apparent inconsistencies in the statements quoted above from these two
3.
le t t e r s , and would ask why, i f the member hanks on the whole have
given sa tisfa c to ry cooperation, you now desire to increase the discount
rate, and would ask what your purpose is in increasing the rates under
the conditions pointed out.
In the f i r s t of your le t t e r * o f May 10th you raised doubts as to
whether you could law fully refuse accommodation to member hanks even
though tne accommodation is fo r the purpose o f sustaining or increasing
security loans.
The 3oard would ask whether, in your opinion, a member
hank under the Federal Reserve Act has the right to obtain any amount of
accommodation i t d e sire s, on presenting e lig ib le c o lla t e r a l, free from
any scrutiny or supervision of the Federal Reserve bank?
I t would
scarcely be necessary to point out that i f this be your opinion, the
banking doctrine o f d irect action would necessarily be thrown into the
discard.
T'orm^o. 131.
Office Correspondence
FEDERAL RESERVE
BOARD
Date
May 17, 1 9 2 9 .________
To
Mr. Hamlin
SnKjwi;
Proposed, re_ply_to Mr. Me
Fmm
Mr. Wyatt
_________ Carrah's le t t e r o f May 1 0 ,1 929._
Dear Mr. Hamlin:
In accordance with your request, I submit below a memorandum
o f the detailed suggestions which I submitted to you ora lly th is
afternoon with regard to the text of your proposed reply to the
le t t e r addressed to the Federal Reserve Board by Mr. McGarrah,
Chairman of the Board of Directors of the Federal Reserve Bank of
New York, under date of May 10, 1929.
- *
On page 2, lin e 6, you speak of a bank»s "required reserves
against such lo a n s".
This is technically inaccurate because the
Federal Reserve Act does not require any reserve against loans, but
requires member banks to maintain reserves only against their deposit
lia b ilitie s .
It is possible that you had in mind the reserves which
might be required against deposits arisin g out of the making of
security loans or p ossibly the restoration of a bank's reserves a fte r
such reserves have been depleted as a re su lt of making security loans.
On page 3, lin e 20, I believe your statement would be stronger
and more appropriate i f you omit the words " i t is confident th a t ".
(
\
J
^
On page 6, lin e 12, I b elieve the sentence would be much stronger
end more appropriate i f you would strik e out the words "the Board
f e e ls confident th a t".
On page 7, lin e 2, you use the expression "the withdrawal of
money from c ir c u la tio n ", and I fear that th is expression might be
misunderstood or might be twisted by adverse c r itic ism so as to con
vey the impression that you desired the banks to withdraw money from
c ir c u la tio n .
I believe i t would be better i f , instead of referring
to the withdrawal o f money from circu la tio n , you would use the phrase
"th e return flow of surplus currency".
My comment on the suggestion referred to in the second paragraph
on page 7 of your le t t e r is that Federal reserve banks are not re
quired by law to extend any d e fin ite amount of cred it accommodation
to a member bank nor are they required by lav; to extend credit accom
modation to a member bank under any d e fin ite circumstances. On the
contrary, such a requirement was s p e c ific a lly considered by Congress
and was sp e c ific a lly rejected while the origin al Federal Reserve Act
was under consideration.
Senator Hitchcock had proposed an amendment
which would have compelled the Federal reserve banks to rediscount
fo r any member bank an amount equal to the ca p ita l and surplus of such
member bank and th is proposed amendment was voted down because i t was
-
2
-
f e l t that i t was unsafe and contrary to a l l hanking practice to
deprive the directors of any hank of the right to exercise their
d iscretio n in accepting or rejectin g any application for credit
accommodation. As a compromise measure there was inserted in
Section 4 of the Federal Reserve Act the follow ing provision:
"The
usually
hanking
scribed
hoard of directors sh all perform the duties
appertaining to the o ffic e of directors of
associations and a l l such duties as are pre
hy law.
"Said hoard shall administer the a ffa ir s of said
hank f a ir ly and Impartially and without discrimina
tion in favor of or against any member hank or hanks
and sh a ll, subject to the provisions of law and the
orders of the Federal Reserve Board, extend to each
member hank such discounts, advancements and accommo
dations as may he safely and reasonably made with due
regard f or the claims and demands of other member hanks. "
This provision clea rly forbids p a r t ia lity , unfairness and d is
crimination in the administration of a ffa ir s of the Federal reserve
hank, hut the requirement that the Federal reserve hank shall"extend
to each member hank such discounts, advancements, and accommodations
as may he safely and reasonably made 7*'ith due regard for the claims
and demands of other member hanks" clea rly leaves to the hoard of
d irecto rs of the Federal reserve bank a croad d iscretio n and would
not he violated i f the hoard of directors should deny credit accommo
dation because i t had reasonable grounds to fe e l that such credit
accommodation could not be safely granted, or could not he reasonably
granted with due regard for the claims and demands of other member
banks.
I b elieve, therefore, that i f a member hank has a large amount
o f surplus funds loaned on c a ll to brokers and dealers in stocks, bonds
or other investment se cu ritie s and should apply to a Federal reserve
hank for rediscounts or other credit accommodations, the hoard of
d irectors of the Federal reserve hank would he acting en tirely within
i t s righ ts i f i t should decline to grant such cred it accommodation on
the ground that i t could not "reasonably" he granted under such c i r
cumstances.
In other words, the hoard of directors would he e n tire ly
within i t s righ ts in taking the po sition that a member hank cannot
reasonably demand the use of a portion of the country’ s ultim ate hank
reserves when such member hank has surplus funds temporarily invested
which i t could c a ll in on demand.
-3-
This is merely an informal expression of my own personal
views and is intended solely as a constructive criticism of your
proposed le tte r. I f I can "be of any further help to you, please
do not hesitate to c a ll upon me.
Respectfully,
Walter Wiyatt,
General Counsel
■
.
>
Wif
f
H'p.ii r.nA-Ii luSSITBVE 3AN*k
OF CLEVELAND
i
May 13, 1929
Federal Reserve Board,
Yfeshington, D* C.
Gentlemen:
Receipt is acknowledged of the Board’ s le tte r of May 3, in
which is restated the principle which should govern cer^am _-.3;Federal reserve credit by member banks as outlined in your 1
February 2. J&th this principle we are in complete accord.
-
T.,.r le tte r also points out that, while some progress has been
r, de S ^ r d l h e Board’ s objective in the country generally the rolum._
of security loans in the Fourth D istrict in the aggregate is n°t app. ^
ciablv below that shown on February 6 and that certain banks which have
been more or less continuous borrowers at the reserve bans lB:®
effected any substantial liquidation of security loans since that date.
The following is an extract from the m inutesofthem eeting of the
Board of Directors of this bank held on Fr iday, ay 10,
29“The Chairman read a le tte r from the Federal
Reserve Board dated May 3, 1929, with further refer
ence to the general subject o f the principles whio
should govern the use o f Federal Reserve credi
>y
member banks and directing attention to certain of
.u,
our member banks, which, in the. opinion of the Fed
'■9**
eral Reserve Board, had not as yet made satisfactory
progress in adjusting their security loans. After a
f u l l discussion of a l l of the phases of the problems
presented thereby, i t was the consensus of opinion
that in handling this particular situation the process
of bringing the member banks of this d is tric t m o
effective cooperation with the reasonable purposes of
the Federal Reserve System be le ft to the o ffic e rs of^
this bank, keeping in mind the intricate problems con
fronting member banks and the delicate situations whic
may a ris e . The Chairman was directed t o Pr«PB^ B ^ c
to the Federal Reserve Board expressing the attitude
of this Board**
The Board of Directors of this bank is wholly in sympathy with
r e ™ c o m t* ^ h o w le r! th^t in dealing with the problem with member^
t a n k s a f i p r ^ c t i c a l matter, there is a considerable body of re.p o n .ioanKs
v
, . „
incline to the reserve bank point oi -new,
including°many banks which are not borrowing, and that a t ° ° ' B0^ Te
including may
reaerve banks might be resented as unwarranted°interference with lending policies of member banks. While
VOLUME 195
PAGE 73
in the judgment o f our Board this difference of opinion does not
in any sense relieve us of the obligation to in sist upon the
proper use of our credit f a c ilit ie s or the liquidation of existing
indebtedness in cases where borrowing can be traced to extension
or maintenance of speculative credits, the matter is patently one
of extreme delicacy.
,
*
.
(
In the cases of certain banks, local condition* have practically
compelled an increase of borrowing on c o lla te ra l security. There
has also obviously been a sh ift of margin accounts at brokers to
this form of loans at banks to escape the higher rate charged by
the broker. There has been and continues to be a marked tendency
on the part of a number of our larger city banks to restrict any
further expansion of security loans, this policy finding expression
in refusal to make such loans at a l l ; in requiring an increase in
the margin o f protection for the bank, or in higher interest rates
for this class of loan.
I t w ill be the policy of the o fficers of this bank to proceed
at once to c a ll into conference those member banks which aare or
which seem to be out of lin e , using the most expedient method in
each individual case. V»e shall be pleased to report to your Board
the reaction of our member banks to such conference. I t is our
b e lie f that this procedure is consistent with the thought outlined
in your le t te r .
Very tru ly yours,
(Signed) Geo. DeCamp
Chairman of the Board and
Federal Reserve Agent*
} f t C f L vft Cl4*»iM4*d
COPY
FBBSRAL RBSRRVi BALIX
OP CLiiVilLAin)
May 15, 1929.
Federal Reserve Board,
Washington, D. C.
Gentlemen;
At the regular meeting of the Board of Directors of
the Federal Reserve Bank of Cleveland held on May 10, the
follow ing resolution was unanimously adopted;
"RESOLVED, That i t is the opinion of
th is Board that the most e ffe c tiv e
control of the present disturbed
credit situ ation a risin g from the
condition o f the speculative security
market is to be found in a prompt
advance in the rediscount rates of
the Federal Reserve Banks. The
Chairman of this Board is instructed
to communicate th is resolution to the
Federal Reserve Board as the w e llconsidered opinion of the directors
of the Federal Reserve Bank o f Cleveland'].
You w ill appreciate that this i s a voluntary action
on the part o f our Board and came ^s a re su lt of a great
deal o f discussion and consideration o f the general situa
tio n .
Very truly yours,
(S) Geo. DeCamp,
Chairman of the Board.
VOLUME 19$
PAGE 74
W
it
i o r n f N o . 1 31
A
i♦
0ffic e Correspondence
Tn
FEDERAL RESERVE
BOARD
L>ate---- Us# I S , 19-^
Subject:.
Mr. Hamlin
From Hr* r c c lo lliw l
, ro
fb e r*
R e s e rv e
is
3 *a te
a tta c k e d
o f
3 « *
h e re to
T o re ,
copy
s a la a m e d
o f
to y
th e
r .
p ro p o s e d
le tte r
G r a n ta ,y w s
a t
to
th e
th e
-p
VOLUME 195
PAGE 75
F e d e ra l
m e e tin g
Board th is erasing*
2— 8405
o f
tu *
:
M ay
D ear
i'r .
C h a ir m a n ;
The
B o a rd
K^y
1 0 th
and
a t
f our
fin d
th is
o f
e d k n o w ie d g e s
a lto
yo u r
tin e
yo u r
le tte r
tith e s
le tte r
r e c e ip t
to
f i r t t
o f
ta k e
o f
tu t
yo u r
svae
:n ® n tio n e d ,
le tte r
d a te
c o g n is a n c e
fro ®
1 5 ,
to
o f
to
i t
Y ic e
tn e
w n ic h
1929.
u rd e r
G o v e rn o r
la n g u a g e
th e
d a te
in
o f
^ la ti*
p a ra g ra p h
fo llo w in g
e x c e rp t
y
i t
q u o te d !
«0n
th e
w h o le ,
exceptions,
d is tr ic t
h *v e
c o o p e r a tio n
Ths
tw o
rb o v e
e x c e p tio n s
yo u r
o f
to
th e
F e d e ra l
In
v ie w
d is tr ic t,
*n m e
bank*
by
i t
e f f o rts
g iv e n
w ith
w r*
in
yo u r
B o a rd
in
of
th e
is
in fe r r e d
ih tt
e ffo rts
by
th e
w ith
it s
you
nave
to
le tte r
you
you
been
th is
o f
tr ie
as
to
in
th e
t * e ir
th a t
you
w ith
have
s itu a tio n
2nd
m em ber
e x p e c tin g
m a k in g
o f
ta n k .* *
F e b ru a ry
by
tw o
tills
c o o p e r a tio n
fe e l
a re
o r
in
m e mo o n i n g
c o rre c t
fa c ilitie s
s a tis fa c tio n
th a t
th e
one
banks
e v id e n c e
o f
B o a rd
e ffo rts
c r e d it
p o s s ib ly
m e ia b ^ r
s a tis fa c to r y
th e
s a tis fie d
K e e e rv e
w ith
p r in c ip a l
in te r p r e te d
you
b o r r o w in g
re fe rre d
use
is
n o s e v e r,
th e
as
an
one
hod
or
fro m
w h ic h
w as
im p r o p e r
b a n k *.
te e
to
s itu a tio n
c a rry
p a s t.
on
F ro m
in
your
w ith
a ll
th e
of
w h ic h
i
th e
B o a rd
fe e ls
th a t
c o rre c te d
M id
th a t
s itu a tio n
w ill
be
c r e d it
c o n c e rn e d ;
is
n e c e c tity
fo r
fro a
fiv e
to
B o a rd
o f
an
s ix
i t
th s
s itu a tio n
m ay
fu lly
e r e c t,
D ir e c to r s
o f
in
yo u r
to e
d is tr ic t
v e ry
a d ju s te d
so
fa r
ns
conveys
to
tn e
B o a rd
and
in c r e a s e
p e r
in
in
tn e
n e ar
say
ro te
s t
c e n t,
w h ic h
in
yo u r
bank,
nas
th e
p
been
a t
o f
tn e
f*e w
b e in g
th a t
th e
F e d e ra l
in p r e s s lo n
seem ed
la r g e ly
r a p id ly
fu tu re ,
m is -u s e
th e
d is c o u n t
is
th a t
Ton;
d e s ir a b le
e lla d n r te d .
H e s e rv e
any
hank
by
th e
■ftp. iic aTTah..................Z
The
e x c e rp t
B o a rd
fr o ic
a ls o
th e
n o te s
w ith
m o re
i* > a t p a r a ftp s p h
o f
th a n
yo u r
rtbel levin*: that to adopt eiy
• ..
•
p a s s in g
in te r e s t
th e
fo llo w in g
le tte r s
i
i f f ©rent
r >ce:iure
.‘
It would appreelate your writing tiro* explaining more In detail
is
w hat
m eant
s e r io u s
le s s
In te r
ndopt
le tte r s
re fe r
c o n tr o v e r s ia l
any
d iffe r e n t
p ro c e d u re
B o a rd
f^ e le
b o r r o w in g
banks
In te n tio n
of
b le
s in c e r e ly
ie
th e
e g re s s e s
re a s o n
to
a
num ber
n a tu re
B o a rd
th e
hoped
to
ta n t
end
t i«
r a p id ly
hope
c o r r e c tio n
d is tu r b a n c e
o f
ju e s tic m *
w n io h
c»ay
be
w h ic h
m ade
th a t
b e in g
In
th a t
e lll
you
o rd e r
ta is
to
s h a ll
nnd
o f
fe d e ra l
a d ju s te d
o u tlin e d
in
in tu e tr y
m l3 -u s e
be
it s
to
p r e c ip ita te
tn e
a re
of
a
s u b je c t
fu lly
c r e d it
e o n p ly
le tte r
o f
F e b ru a ry
c o n tin u e
to
in s is t
fu lly
noco
p U s n
a c c o m p lis h e d
c o m m e rc e .
Secretary.
”r, Oates *• KcOarrah, Ch&irran,
Federal Reserve Bonk,
fcew York, N# Y#
re s e rv e
m o re
Y ours very truly,
* l f lit
w o re
o f
a
c o r n a n n lo e tio u .
Tne
and
*to
aon sequenaes* T
Y our
ar
by
It s
w ith
.'in d ,
upon
w ith
th e
1929,
e v e ry
p u rp o s e #
th e
by
le a s t
I t
Is
p o s s ib le
FiiD&RAL RESEBVS BANK OF BOSTON
V
May 15, 1929.
Federal Beserve Board,
Washington, D. C.
*
Dear Sirs:
Supplementing my le t t e r to the Federal deserve Board of May 8 , in answer
to the Board*s le t t e r of May 3 on the subject of the Use of Federal Beserve
Credit by Member Banks, I beg to say that the Governor and n yself have
analyzed the condition reports of a l l of our member banks and have communicated
with sucn of those banks that might appear to be carrying a considerable
volume of security loans, or wnich have been continuous or frequent borrowers
of th is bank. With the possible exception of one member bank in the western
part of the State, which is borrowing $ 1 ,000,000 and has had $ 1 ,2 0 0 ,0 0 0 out on
c a ll in New York, the borrowings of our member banks from th is reserve bank
would appear to be ju s tifie d by their condition. The Governor has communicated
with the bank above referred to and we hope to have an interview with i t s
President in the near future. This p articular member bank has lo s t about
$2,000,000 in deposits since the f i r s t of tne year and is carrying something
over $5,000,000 in United States se cu ritie s and $8,000,000 in other bonds.
The weakness of the bond market, esp ecia lly Governments, has prevented tuis
bank liquidating i t s security account without considerable lo s s .
Since the f i r s t of the year tnere has been a lo ss of about $100,000,000,
in the deposits of member banks in th is d is t r ic t . This lo ss in deposits and
the situation existing in the security market, more especially in connection
with Government se cu ritie s, namely, the continued weakness in the bond market
has, in many cases, prevented our banks from correcting their position with
out taking heavy lo s s e s . The o ffic e r s of th is bank have followed very closely
the borrowings of a l l of our member banks, and the banks in th is d is t r ic t
are not only cognizant of the Board*s views in relation to loans against
secu rities but are cooperating as far as their own particular position
warrants in carrying out i t s p o lic ie s . In view o f their large security hold
ings our member banks are especially anxious to see more normal conditions
in the money market.
Yours very tru ly ,
(S)
Frederic H. C urtiss,
Chairman.
VOLUME I95
COPY-
Page 76
FEDERAL RESERVE BAM OF PHILADELPHIA
May 16th, 1929.
Dear S i r :I
ain instructed by the Board of D irectors ,of th is bank to reply as
follow s to your le t t e r o f A pril 30th:
.
That le t t e r called attention to eight member banks in th is c ity which
had been borrowing more or le s s continuously from th is bank, and had Mnot
effected any substantial liq u id ation in th eir security loans since February
6 th” , and requested us to cooperate with the Federal Reserve Board in inquiring
from each of these banks whether there was anything which mad® i t impracticable
fo r i t to readjust i t s p osition in accordance with the views o f the Board, or
anything which made such readjustment undesirable from the point of view of
the public in te r e s t, and, further, ”why i t should not bring about the readjust
ment expected by the Board” .
Answers to these questions had been given by the w riter in the Conference
held with the Board on A pril 4th , and have since been elaborated in le t t e r s
to the Acting Governor of the Federal Reserve Board. These answers might
readily have been repeated immediately upon receipt of your l e t t e r . We
realized that there was no p o ssib le way in which such in q u iries could be made
of the member banks without creating f r ic t io n , i l l - w i l l , and resentment.
Potent among the reasons wnich made i t d i f f i c u l t fo r them to readjust their
p o sitio n s in accordance with your views was your in sisten ce upon the maintenance
of a discount rate below a ll other rates fo r money.
D esiring, however, to cooperate in your p o licy to the extent of our power,
and to put before you r e p lie s d ir e c tly from the banks concerned, we enclosed &
copy of your le t t e r to ten member banks - seven o f the eight on your l i s t (the
eighth having en tirely paid o f f i t s indebtedness to us on the day your le t t e r
was received), and three others ” in the same general c la ss” as determined
from our record*.
.
We enclose herewith a copy of our le t t e r of transm ittal, and copies of
the re p lie s received from nine of the ten banks addressed. The tenth bank a large trust company, which, upon the completion of a pending consolidation,
w ill have about $ 3 0 ,0 00,000 cap ital and surplus - had decided, we hear from
the outside, to make no reply to the le t t e r and to withdraw from the System.
Our member banks are generally cooperative, and w illin g to abide by any
rules of general application, but they resent what they regard as interference
with th eir conduct of th eir own a f f a ir s . Most p a rticu la rly do they resent
th is interference when i t comes from Washington.
We b elieve that we have now realized substantially the f u l l benefit
anticipated from tne Act of A p ril 19th, 1929, authorizing special rates of
in te re st on security loans. This was referred to in the w riter*s le t t e r of
the 3rd instant to Acting Governor P la tt , in which was enclosed a memorandum
VOLUME 195
PAGE 77
-2 -
of changes resulting from the passage of th is Act between A pril 26th and May
Continuing th is record fo r another twelve days, i t appears that between
A pril 26th and May 14th our discounts to out-of-town banks have increased
$ 1 , 1 0 0 , 0 0 0 - from $ 4 5 , 5 0 0 , 0 0 0 to $ 4 6 , 6 0 0 , 0 0 0 - but during the same period our
discounts to banks in th is c ity have decreased $ 4 7 , 5 0 0 , 0 0 0 - from $ 7 1 , 9 0 0 , 0 0 0
to $ 2 4 ,4 0 0 ,0 0 0 .
Our lo c a l banks have thus been able, in le s s than three weeks,
to g e t back a large part of the money which tney had been stead ily losing
to New York fo r a year or more previously.
2nd.
I am,
Very tru ly yours,
(S) Geo. W. N orris,
Governor.
Mr. JS. M. McClelland, A ssistant Secretary,
Federal Reserve Board,
Washington, G. C.
May 6th, 1929.
Mr.
My dear Mr.____________
Following previous correspondence on the same su b ject, the Federal
Reserve Board addressed to the Acting Chairman of the Board of D irectors of
th is bank a le t t e r , copy of which i s enclosed herewith, omitting the names of
the p a rticu lar member banks referred to therein. The sign ifican t fa c t in
th is le tt e r i s th at, whereas the 592 weekly reporting banks in the country as
a whole have reduced th eir security loans to brokers by 410 m illio n d o lla r s,
and have increased such loans to w0thersM by only 189 m illio n d o lla r s , e ffe c t
ing a net reduction of 221 m illio n d o lla r s, the weekly reporting banks of th is
D is tr ic t have reduced th eir loans to brokers by only 14 m illion d o lla r s , and
have increased their security loans to others by 22 m illion d o lla r s , r e su lt
ing in a net increase of 8 m illion d o lla r s . You w ill r e c a ll that in our le t t e r
of February 21st l a s t , asking fo r the cooperation of a l l our member banks in
correcting the e xistin g over-extension o f cre d it, we esp ecia lly asked them to
be on guard against Mthe growing tendency of persons speculating in the stock
market, under the pressure of high carrying charges by brokers, p r a c tic a lly
to tran sfer th eir accounts to banks*.
As the___________________ Bank i s in the general cla ss referred to in
the Federal Reserve Board1s le t t e r , I am instructed by the Board of Directors
o f th is bank to request a reply from you on the points referred to in the
paragraphs indicated by a marginal note.
Thanking you in advance fo r your compliance with th is request,
I am,
Very truly yours,
(S)
Geo. W. N orris,
Governor
SOUTHWABK NATIONAL BANK
Philadelphia, P a ., May 15, 1929.
Mr. George I . N orris, Governor,
Federal Reserve Bank,
Philadelphia, Pa.
Dear Mr. N o r r is :We are in receipt of your favor of May 6th, and in reply beg to
state that i t ha* always been our endeavor to cooperate with the Federal
Reserve Bank in every way p o ssib le .
Both our loans to brokers and our loans on security to others have
been reduced since the f i r s t of the month. While our secu rities have increased
during the period, i t i s largely due to bonds which were purchased by us being part of an issue put out by one of our good customers. However, since
the f i r s t of May mr secu rities have also been decreased.
Yours very tr u ly ,
W. W. Foulkrod, J r .,
President.
T H E N A T I O N A L SECURITY B A N K
Philadelphia, P a ., May 9, 1929.
Mr. George W. N orris, Governor,
Federal Reserve Bank,
Philadelphia, Pa.
Dear Mr. N orris:
We have at hand your favor of the 6th, in which you state that our
loans on secu rities to others have Been increased by about $520,000 between
the periods of February and A p ril.
I
was rather surprised that such was the case, esp ecia lly in view
of the fa ct that we have been making no loans to customers on stock exchange
c o lla te r a l except in a very few cases where the connection has been such that
i t was impossible fo r us to refu se.
I
went over the weekly report of the member banks furnished by us,
and fin d your information i s correct, but i t i s not a true state of a ffa ir s
according to our report, as our A ssistant Cashier has doubled up in th is
particu lar matter.,On our la st Government report as of March 27th our loans
to others secured by U. S. Government and other se c u r itie s, in other words
5 C, showed $ 1 ,8 8 6 ,0 0 0 , and.to th is amount our A ssistant Cashier added $335,000
represented by 6 B under the same schedule, making in a l l a to ta l of $2,100,000
which amount he has been approximately reporting.
I have had our Discount Department take o ff exact figu res on our
loans to others as of A pril 8th, and these amount to $ 1 ,6 2 2 ,0 0 0 instead of
$2 ,0 0 0 ,0 0 0 as reported, which accounts fo r the $500,000 increase as mentioned
in your le t t e r .
In th is to ta l of $ 1 ,6 0 0 ,0 0 0 there i s an amount of $468,000 loaned
on the stock of corporations doing business with us, none o f which are lis t e d
on either the Philadelphia or New York stock exchange, but a l l of which we con
sider f i r s t cla ss loans. Some are c lo se ly held commercial corporations; some
of these c o lla te r a l loans are on building and loan stock which would re a lly
p u ll the amount loaned to others down to a figure of $ 1 ,1 5 0 ,0 0 0 . At the
present time we have no loans to brokers in New York C ity, nor have we had any
for at le a st seven or eight months. Our loans to brokers in Philadelphia at
our la s t c a ll amounted to $145,000, which was granted more to an investment
house instead of the broker having a seat on the exchange, against which he
keeps a very satisfactory balance. I think when you match th is figure up with
our to ta l loans and discounts approximating $ 1 0 ,6 0 0 ,0 0 0 , you can see that the
balance of our paper would be en tire ly fo r commercial purposes.
We regret very much the error on our part, and can assure you that
we are working along with the Federal Reserve Bank in every way possible, I am
t
Yours very tr u ly ,
John W. Whiting,
President.
My dear Governor N o r r is :I wish to acknowledge your le t t e r of May 6th, and beg to submit the
follow ing data and explanations.
On the sheet marked MCopy AM, you w ill notice an increase in secured
loans to others amounting to $576,000, or 4 $, while loans to brokers increased
$ 1 ,3 1 0 ,0 0 0 , or 15$. The decrease in our investments account of $653,000 was
more than enough to take care of the increase of $576,000 in loans to others.
The security was of sim ilar nature and a substantial margin e x is ts in the loans
which was not in the investment account so that the Bank has $77,000 le s s at
risk against secu rities which are o f value in excess o f the amount of $653,000
that was in the investment account.
Included in secured loans to others are loans to correspondent banks
which fo r February amount to $ 4 ,5 2 6 ,5 4 2 , and on May 1st were $ 5 ,8 1 5 ,7 4 8 , an
increase of $ 1 ,2 8 9 ,2 0 6 . I t would, therefore, seem that the increase in our
loans to others than brokers i s accounted fo r by loans to correspondent banks,
which, during the period under discussion show an increase of $ 1 ,2 8 9 ,2 0 6 , while
our to ta l loans to others than brokers increased only $576,000, indicating
a reduction of over $700,000 in secured loans to individuals.
The increase in direct loans to
fo r by a decrease in loans fo r account of
the resu lt of money being taken away from
elsewhere. These d irect loans to brokers
balances with us fo r some time.
brokers o f $ 1 ,310,000 i s accounted
correspondent banks of $ 1 ,5 3 0 ,0 0 0 ,
th is market because of higher rates
are to brokers who have had substantial
In connection with the above discussion you w ill find on “Copy A“
comparative figu res as o f April 24th and May 8th showing a somewhat d ifferen t
p ictu re.
R espectfully,
Livingston £ . Jones
President.
(COPT)
■1 >
it
_
1929
Increase
or
Decrease
(Amounts in m illion s of d o lla rs)
February 6
Total Loans and Investments
Security Loans:
To Brokers
To Others
A ll Other Loans
Investments
51,846
54,073
4 2,227
8,777
14,289
12,805
15,975
10,087
14,865
13,799
15,333
4 1,310
4
576
4
994
A pril 24th
Total Loans and Investments
Security Loans:
To Brokers
To Others
A ll Other Loans
Investments
51,672
10,087
14,865
13,799
15,322
7,422
14,587
14,440
15,333
4 ,5 2 6
653
- 2,401
2,665
278
4
641
99
-
mm
May 1st
5,815
'
4 1,289
4
576
713
A p r il, 1928
Average P articipation
-
May 8th
54,073
February 1st
Loans to Correspondent Banks
Loans to others than brokers
Reduction in secured loans
to individuals
A pril 24
3,446
A p r il, 1939
1 ,9 1 6
- 1,530
BANK OF NOETH AMERICA & TRUST COMPANY
Philadelphia, P a ., May 7, 1929.
Hon. George W. N orris, Governor,
Federal Reserve Bank,
Philadelphia, Pa.
My dear Governor
In reply to your valued favor of the 6th of May, I beg to submit the
follow ing information:
February 6
May 6
(Amounts in m illio n s of d o lla rs)
Total Loans and Investments
Security Loans:
To Brokers
To Others
A ll Other Loans
Investments
48,611
47,441
10,548
12,975
15,502
9,586
7,305
15,228
18,559
6,349
- 1.170
- 3,243
4 2,253
♦ 3,057
- 3,237
I have taken the lib e r ty of bringing our record up to May 6th instead of
as A pril 24th, as records of th is character which are approximately two weeks
old are more or le s s inaccurate.
Insofar as th is Company i s concerned, i t i s always a delight to me to
give you the f u lle s t information, but I cannot restrain myself from express
ing ray view that i f the Federal Reserve Board had been awake to the conditions
that existed a year to a year and a h a lf ago, they might have adopted a policy
that would have proven b etter fo r them and better for the banks. As I see i t ,
the policy pursued at that time o f maintaining an a r t i f i c i a l l y low rediscount
rate to aid the Treasury in refunding the Second and Third Liberty Loans was
unsound and to a great extent the cause of the unfortunate credit condition
of today.
However, th is water has gone over the dam and the banks that have had
the courage to strain themselves to uphold a proper credit po sition have the
honor to be on the censure l i s t of the Federal Reserve Board. I t may not be
out of place to c a ll your attention to th is Company, that at the Federal
Reserve Bank th is morning our debt i s only $ 1 ,2 0 0 ,0 0 0 . I am,
Very truly yours,
John H. Mason
President.
V
TRADESMENS NATIONAL BANK & TRUST C O .
Philadelphia, Pa., May 9, 1929.
Mr. George W. Norris, Governor,
Federal Reserve Bank,
Philadelphia, Pa.
My dear Governor Norris
Referring to your letter of May 6th and the letter of the Federal Reserve
Board dated April 30th, a copy of which was enclosed, we have prepared a
scnedule showing the amounts outstanding in the various classes of loans,
following the schedule on page 2 of the Board*s letter. In addition to the
condition on the dates specified, February 6th and April 24th, we have added
our condition as at May 7th. If the fact that this bank does a very large
commercial business is taken into consideration, it will be apparent that
cur cooperation, as indicated by the figures of April 24th, was well in line
with that of the system as a whole, and if the general condition since April
24th has not improved in the system as a whole, then the figures that we
present as at May 7th would show a more marked cooperation. The statistics
of this bank indicate that in the early spring and in the early fall of
each year we have a very heavy demand from our commercial borrowers, which
liquidates itself seasonally. Despite the generally large divergence of loan
able funds into speculative channels, it occurs to us that we have kept our
situation well in hand.
The results that we have achieved have been at some cost to us, because
through the play of competition other banks appear to be willing to do those
things that we felt were in defeat of the plan proposed by the Federal Reserve
Board to bring about a more wholesome condition in the use of credit. This
play of competition brings with it questions which make complete cooperation
upon the p^rt of the banks practically inpossible, and this will continue, it
occurs to us, just so long as the spread between the rediscount rate and the
rate obtainable for speculative loans is as great as it is at the present
time. It is most discouraging to a bank that is trying to give whole-hearted
cooperation to find that the only result of such action upon its part is in
frequent loss of valuable business. We here feel that until the spread here
inbefore referred to is reduced through the application of an appropriate
rediscount rate, the result will be indifferent.
While you will realize that we are expressing no new thought on the
subject, yet we feel that this is an appropriate occasion to record our views.
If we are expected to aid in a program based entirely upon individual co
operation, it occurs to us that the possibility of profit to those who fail
to cooperate should not be so great as to penalize too heavily those who do
cooperate.
tSincerely,
Howard A. Loeb,
Chairman.
COPY-
April 34
1929
Increase
or
May 7
1929
Increase
or
(Amounts in thousands of dollars)
.
Total Loans and
Investments
41,436
-
152
165
3,368
-
697
90
15,052
-
340
4 2,513
18,336
41,797
♦ 1,568
41,588
43,156
4,065
3,900
-
15,392
15,482
♦
16,559
19,072
Investments
5,572
4,702
Owing
Federal
2,400
4,650
Security Loans
to Brokers
To others
All Other Loans
-
870
4,660
3,200
•
'
-
912
(C O P Y )
THE PHILADELPHIA NATIONAL BANK
May 9, 1929
My dear Governor Norris:
This will acknowledge your letter of May 6th, enclosing copy of a
letter addressed to the Federal Reserve Bank of Philadelphia by the Federal
Reserve Board under date of April 30, 1929.
This bank has used every reasonable effort to keep its loans with
the Federal Reserve Bank down to a minimum, but as I have advised you on
several occasions as the largest bank in the Philadelphia Reserve District,
the legitimate calls on us by Banks and Trust Companies keeping accounts
with us, plus the many commercial demands upon us and again plus reduced
deposits, have caused us to borrow for what we would call the legitimate
needs of our clients and they are not speculators*
■j
Vie have on the other hand for many months been fully aware of the
nedessity of curtailing credits for speculative purposes and since the
recent enactment of the Pennsylvania State Law permitting the charging of
over six per cent ( 6 « on demand loans, have been able to reduce our bro
kers* loans from $26,938,000 on March 19th to $12,464,000 on May 7th,
which is a ridiculously small amount for a Bank of this size to be carrying
when you consider that our total loans and investments are $229*000,000.
We have also been refusing to make loans to individuals for the
purpose of taking up speculative acoounts with brokers*
During the.past two weeks and before receiving your letter of
May 6th, we have reduced our debt to you from $26,000,000 to $5,500,000.
which is evidence of our ability and willingness to co-operate with the '
spirit of your communication.
We beg to assure you, however, that we are in a highly competitive
business and at times need varying sums of money to care for a widely di
versified clientele of legitimate users of money and we feel for this
purpose, we have a right to call upon the Federal Reserve Bank for redis
counts within reason*
Respectfully submitted,
(Signed) Joseph Wayne, Jr.
President
To the
Honorable George W* Norris,
Governor, Federal Reserve Bank of Philadelphia,
Philadelphia, Pennsylvania.
(con)
THE MANAYUNK-QUAKER CITY NATIONAL BANK
Philadelphia, May 7, 1929
Hon. George W. Norris, Governor,
Federal Reserve Bank,
Philadelphia.
Dear Governor NorrisJ
fte are in receipt of your letter of May 6th and have very
carefully noted its contents*
You say our loans on securities have increased about $291,000.
This is correct, but a large majority of these loans have been loans to
industrial business, but as the notes carried collateral we have accord
ingly listed them as time loans with collateral.
We are carrying at the present time $685,000 loans to brokers,
who have been doing business with us for some time and naturally look
for some accommodation. We are not increasing these loans.
Please note also that our bond account as of December 31, 1928
stood at $2,129,000. On May 6th this account had been reduced through
sales to $1,550,000.
On April 16, 1928 at the time of the merger of this institution
we had on d e p o s i t .... — ............................
On December 31, 1928 ....................... 11,962,
•
On May 6, 1929 ............................ 10,869,000.
a reduction of approximately $1,600,000. We are not taking into con
sideration the new accounts, which we have put on our books during the
past year, which would increase this reduction very much*
We are trying to co-operate with your bank in every way, but I
feel that while the Federal Reserve System has been cognizant of the ^
credit situation, which has been growing for some time, a lack of suffi
cient action has produced a condition which is responsible for large
balances being withdrawn to be placed on call in the stock market.
At the time I received your letter one of our customers was at
my desk, advising me that he was withdrawing a $100,000 deposit, which
he had with us to be placed with a broker at the 14> rate today.
If we had the balances, which we know have been reduced to be
placed on call in the market due to this situation, we would not be bor
rowing any money from your institution.
We feel that we are n o t making any loans inconsistent with
your policy and we are doing our utmost to help in the situation.
Yours very truly,
(Signed)
W. A. Dyer
President*
(C O P Y )
CORN EXCHANGE N A T IO N A L
BANK AND TRU ST COMPANY
Philadelphia, May 8, 1929.
Mr. George IV. Norris, Governor,
Federal Reserve Bank,
Philadelphia, Pennsylvania.
My dear Governor:
The officers of this bank have carefully read your letter of
May 6, and the letter of the Federal Reserve Board attached.
In the latter letter, there is an inquiry as to whether there
is anything in the bank’s condition which makes it impracticable for it to re
adjust its position in accordance with the principle outlined, in our partic
ular case there is.
At the request of the Philadelphia Clearing House and the State
Banking Department, we have taken over the Union Bank and Trust Company and
are attempting to liquidate it. The Union Bank deposits dropped $10,000,000
in a few weeks’ time with practicaiyno drop in loans and investments. We
are liquidating this bank in cooperation with the banks of the Clearing House,
and I feel we have done the public a very good service in taking on this work.
If this bank had closed with twenty-five or thirty millions of assets when the
money market in New York was 20$ it might have caused widespread trouble and
very likely would have caused several other banks in Philadelphia to close.
We have succeeded in liquidating quite a lot of this business, and with borrow
ing only four millions from the Federal Reserve at the present time, I think
is doing very well*
My sympathy has been with the Federal Reserve Bank, and I know
their task is a most difficult one, but I think the statement that a member bank
is not within its reasonable claims for rediscount facilities because it has some
speculative loans in its portfolio is not a proper statement for an important
body like the Federal Reserve Board to make, and while I have been in favor of
curbing speculation, I think there is a great deal of truth in Secretary
Owens* statement made a few days ago in the papers. The Federal Reserve Board
can carry its plans too far for the good of the country. Many commercial loans
that formerly were financed through the banks are being handled through the
open market, and I think the basis for the whole trouble as far as tightening
of money is that we have bought some fifteen billions of foreign bonds.
Perhaps it might have been better if the gate had been closed when these
issues were flowing so steadily from foreign countries.
I do not wish you to get the impression that we are not anxious to
cooperate with you in this matter, but we feel that the situation is one that
will have to be handled very carefully, and the statement that the Federal Re
serve Board makes is too drastic. I think it might be well the next vacation
the Board takes, instead of crossing the Atlantic to the east, that they cross
the Itockies to the west, and see what a wonderful country the United States
really is. It seems that very few people in this country realize the tremen
dous wealth and resources that we have, and I further feel that the amount of
loans on collateral are not very much out of the way in proportion to the
wealth of the country.
(copy)
COHN EXCHANGE NATIONAL BANK AND TRUST COMPANY
Governor Norris
-
2
-
5 /8 /2 9
^closed is a copy of “The Corn Exchange* published by this bank
whic h contains an article on "Brokers Loans," This was written some time
ago, but I think it contains many pertinent facts.
I see the railroads have been asked to reduce freight rates on
wheat shipments to help in the exporting of our surplus. If some of
these shippers wanted several thousand dollars to finance this, with the
present condition of the money market, and the temperament of the Federal
Reserve Board, I should be inclined to turn them down. Personally, I feel
there is plenty of credit in the country to move all the crops that it will
be necessary to move in the Fall and still allow the banks to carry a reason*
able amount of collateral loans on their books.
Sincerely yours,
(Signed) CHAS. S. CALWELL,
President.
CSC-G
'
■.;
*,
\
{
(C O P Y )
j
:
4 j
■
PROVIDENT TRUST COMPANY
OF PHILADELPHIA
May 8, 1929
Hon* George W. Norris, Governor,
Federal Reserve Bank of Philadelphia,
925 Chestnut Street, Phila*, Pa*
My dear Governor Norris:
I am writing in reply to your letter of May 6th, enclosing copy
of letter addressed to the Acting Chairman of your Board of Directors by
the Federal Reserve Board under date of April 30, 1929*
We had duly noted the request contained in your letter of Feb
ruary 21st laat to co-operate *in correcting the existing overextension
of credit* and *to be on guard against 1the growing tendenoy of persons
speculating in the stock market,.under the pressure of high carrying charges
by brokers, practically to transfer their accounts to banks1.* While the
Security loans* of this Company have in the past represented a comparatively
small proportion of its total *loans, discounts and investments*, particular
attention was given to your request, ft substantial decrease was effected in
the aggregate of our loans to brokers, and there appears to us to have been no
undue increase in security loans to others, with proper regard to the legiti
mate needs of our customers* Our officers believed that the extent of our
borrowing at the Federal Reserve Bank had been entirely justified by the prop
er needs of the Company in the conduct of its business, but desiring to evi
dence their cooperation in the results sought as indicated in your letter of
February 21st, decided to proceed within as short a time as practicable to
effect a substantial reduction in its debt to the Federal Reserve Bank.
While no progress in this respect appears from a comparison of our reports for
February 6th and April 24th, the two dates referred to in the correspondence,
there had actually been a considerable reduction from the maximum of our bor
rowings since the first of the year, and as a definite result of the process
of adjustment we had undertaken, the report which I received in due course
tbig morning shows that w ";?re out of debt to the Federal Reserve Bank at the
close of business yesterdayf May 7th*
<r»s&zy
It seems hardly nec
for me to reply at greater length to your
letter or to the communication from the Federal Reserve Board enclosed with it*
I shall, however, be glad to supplement this letter to any extent that nay be
necessary or desirable for your purpose*
Very truly yours,
(Signed) Parker S. Williams,
President*
i
THE PENNSYLVANIA COMPANY
Philadelphia, Pa., Slay 16th, 1929.
Ur. George 1. Norris, Governor,
Federal Reserve Bank,
Philadelphia, Pa.
dear ir. Norris
In. Mr Packard* s absence I am taking; the liberty of replying
to your letter unuer date of ray Stn with furtner reference to previous
correspondence in regard to the objections of the federal Reserve Board
to the member banks borrowing continuously from your bank, and wisn to
lake the following statemente:1.
As soon as possible after tne receipt of your letter this
Conmany paid off its loans secured by Treasury Certificates, and Also
commercial prper rediscounted with your bank, both of whici aggregated
some >4,865,00J. This liquilati
was accomplished partly oy the call
ing of loans and partly by the sale of our investments. Previous to
this ws soli some $6,000,000 United States 3 3/8*s in order to satisfy
the demands of the Federal Reserve Board.
m
2.
For your Information I would advise you th t in order to
cooperate and to attempt to comply with the requirements of the Federal
Reserve Board tills Company sold some 50,000 shares of tre sury stuck
netting $5,000, OX), and also sold 100,000 shares of Real ?.stcte-L«*md
Title & Trust Company stick aeld in Its investments, netting the Company
some -7,500,000.
This information is transmitted to you in order that you -nay
realize that this Company has attempted to cooperate with the Federal
Reserve Board1* requirements in every way, nd to that end has soli Real
Estate-Land Title A Trust Company stock, a valuable investment.
You of course realise that owing to tne rate of interest being
at six per cent until the latter part of April, when tie new Act was
passed, tne banks, in on eff ort to be .helpful in the situation by taking
care of their clients' requirements, were steadily losing deposits, which
were withdrawn and taken to New York to be lotned at the call money rate
tnere.
I feel that tie federal Reserve Board, with its bility to secure
facts and fi ures not available to other agencies, must nave realised
the situation, and in my personal opinion it would have oeen more conducive
to g od feeling on the part of the member banks if the Federal Reserve
Board had not criticize! the Philadelphir institutions at t ds ti ?r.
Awaiting your further advice, I am.
Yours very truly,
G. S. Newhall,
VOLUME 195
Executive Vice president.
.
I
■
TmMXAL
miKAVt
BA ’K OF 2 AM Kip.i 01 SCO.
Way 20, 1929.
F e d e ra l
R e s e rv e
B o a rd ,
W a s h in g to n ,
1). C.
o ear
S ir s :
ivy
Reference is made to
letter of Hay 10 in re,.>ly to yours
of ry 2, It 7*3 i a is; iule to pl-ce ourselves in cowminication
ith the principals of the four banks mentioned in your letter and.
to prepare a complete report for submission to our Board of Jirectors on «y 16. *e hrve, however* interviewed tares of tne f air ,entle-.eiH h^ve written to the fourth, rnd anticipate very shortly to be
ebl* ti ive you a full report in regard to these banks.
In the meantime, I wish to call your attention to tne following:
(1)
The Bank of Italy ational Trust and Savings
Association ins not borrowed from this bank,
except for one day, since J/ey I3 j
(2)
The Cracker First National Bank hr* reduced
•lightly - -4,800,000 on ey lb, >6,900,OCX) on
ay 20 , *9,200,000 on arch 1 ;
(3)
The ells Fargo £?nk and Union Trust Company
h s reduced from 1 1 ,200,000 on ay 2 to r7 ,000,0 0
on flay 20 .
y
Vie ho^e that, s a result of our interviews, we shall be able to report
further reductions in the amounts borrowed by the Crocker First National
'•nd Wells Fargo* As for the Aaerican Trust Coipany, we have nothing
fevor^ble to report.
Yours very truly,
(3)
Isaac ii, fewton.
Chairman of the Board.
;CpY__ -
VOLUME 195
PAGE 80
2 0 , 1929
Questions fo r New York Federal Beserve Bank:
1*
Purpose o f the 6$ r a te , (a ) T6 c o rrec t r e la tio n o f r a te s?
▲
rate would do t h i s , except as
to accep tances.
What rate on acceptances would you
fa v o r i f the discount rate i s 6 $ ,
(b) To dim inish the demand f o r sp ecu la tiv e
loans by brokers and customers?
This means to d e fla te c r e d it on the
New York Stock Exchange,
Federal Reserve Rank o f C leveland, - "c o n t r o l o f p resent disturbed
c r e d it s itu a tio n a r is in g from con d ition o f the sp ecu lativ e
se c u r ity market**
McGarrah's l e t t e r February 2 1 ,
Memorandum February 7 t h ,
Governor H arrison1s l e t t e r A p r il 9 th ,
2,
Kae not the fin n in g p o lic y o f the System under the 5 $ rate brought
about a m a teria l liq u id a tio n in Federal Reserve c r e d it ?
Tour b i l l s and s e c u r it ie s have d eclin ed
21$ on the average, sin ce January,
Has not t h is fin n in g p o lic y been, on the
whole, su c c e ssfu l?
3,
I s the 6$ rate designed to increase th is rate o f liq u id a tio n ?
4,
Were i t not f o r the New York sp ecu lative s it u a t io n , imuld not business
be e n t it le d today to a lower r a t e , e , g , a
rate?
5,
I s not the New York sp ecu la tiv e f .e v e r th r iv in g today c h ie f ly on
cash purchases o r "lo a n s fo r o th e r s?"
and to an in c re a sin g ly
l e s s degree on Federal Reserve c r e d it?
VOLUME 195
PAGE 81
2
6,
Hay then do you wish to p e n a lize ’business to co rre c t a s itu a tio n
not caused by any bu sin ess o r a g r ic u ltu r a l sp e c u la tio n , and
not now ap p reciably caused by abuse:
o f fe d e r a l Reserve
c r e d it?
7,
Apparent change in p o s itio n as to Increase o f r a t e s .
.
Governor H arrison, A p r il 9 th , favored an a ffiz m a tiv e p o lic y o f
ra te in c r e a se s.
Tour l e t t e r Hay 1 0 th :
"The in crease to 6# might not immediately accomplish
i t s purpose, but as a supplement to a l l the other
e f f o r t s th at have been made and w i l l continue to
be made, w i l l expedite the accomplishment o f that
purpose
8,
I f the 6# ra te f a i l s in i t s purpose, do you s t i l l fa v o r an a ffir m a tiv e ra te
p o lic y o f 7 , 8 o r 9#?
9,
What are the "o t h e r e f f o r t s " you say above you w i l l make under the
6# r a te ?
1 0 , Has the fe d e r a l Reserve Board any fu r th e r duty to perform when i t has
e sta b lish e d a ra te which acconmodates b u sin ess and in d u stry , and
which i s gradu ally preven tin g d iv e rsio n o f fe d e r a l Reserve c r e d it
in to sp e cu la tiv e channels?
11* Tour l e t t e r o f May 10th claim s th at the B o a r d s l e t t e r o f May 1 la y s
down a new and dangerous t e s t o f the abuse o f fe d e r a l Reserve
c r e d it , - "c o n sid e r a b le volume o f se c u r ity l o a n s ,"
Are not s e c u r ity loans one fa c t o r in the abuse o f
fe d e r a l Reserve c r e d it?
That i s , when a bank i s borrowing from the fe d e r a l
Reserve bank too much or too fr e q u e n tly , are not
i t s s e c u r ity loan s as w e ll as a l l i t s o th e r loans
a f a i r su b je c t f o r "s c r u t in y and s u p e r v is io n ,"
which in your l e t t e r o f febru ary 2 1 s t , and
Governor H a r r is o n ^ l e t t e r o f A p r il 2 9 t h , s t a t e s
the bank e x e r c ise s when member banks are too
frequent borrowers?
1 2 , Were not the 14 Hew Tork banks refe rre d to in the B o a r d s l e t t e r o f
May 1 s t "t o o frequent borrowers?"
(a ) Bach bank borrowed from the fe d e r a l Reserve bank
on more than a m a jo rity o f Wednesdays f o r the
year ending January 3 1 , 1 9 2 9 .
These borrowings
varied from 52# to 98# o f the tim e.
3
(1 ))
Bach
hank
b o rro w e d
o n m o re
fro m
th a n
fro m
a
F e b ru a ry
th e
fe d e ra l
m a jo r ity
6 th
to
o f
B ay
th e
R e s e rv e
14
.
hank
W ednesdays
8 th .
1 hank borrowed 8 days out o f the 14*
3
banks
s
9
ii
R
R
R
R
1
bank
■
11
•
R
R
n
R
3
banks
s
12
R
R
R
R
R
5
banks
II
13
RH
R
R
R
H
1 hank borrowed every day o f the 1 4 .
(o )
T h e ir
to ta l
and
an
(d )
8 th
fro m
in c r e a s e
o f
in c r e a s e d
9 2 *3
6 6 *2
b e tw e e n
m illio n s
m illio n s
o r
to
F e b ru a ry
1 5 8 *5
6 th
m illio n s ,
7 l£ *
Their se c u r ity loans during the same p eriod increased
4 4 *2
(e )
b o r r o w in g s
B ay
m illio n s .
Although they reduced their brokers1 loans during
th is
p e r io d
lo a n in g
ab o u t
3 9 7 .4
100
m illio n s
m illio n s ,
th e y
on b ro k e rs
w e re
s t ill
lo a n s *
13*
Under e x is t in g abnormal c o n d itio n s, i s i t a new and dangerous t e s t o f
the abuse o f Federal Reserve c r e d it to sc r u tin iz e a l l o f the lo a n s ,
in clu d in g se c u r ity lo a n s , o f bankB which are frequent borrowers,
and whose borrowings from the Federal Reserve bank have increased
71$ in three months?
14.
As
b r o k e r s 1 lo a n s
lo a n s ,
th e
1 5 .
The
a re
abuse
B o a rd
d id
can
n o t
o f
n o t
be
th e s e
F e d e ra l
ask
and
a re
la t t e r
lo a n s
R e s e rv e
y o u r bank
b e in g
tu rn e d
a
v it a l
in to
c u s to m e rs 1
s e c u r ity
e le m e n t
in
c o n s id e r in g
liq u id a tio n
o f
th e s e
c r e d it?
to
dem and
c u s to m e rs
s e c u r ity lo a n s , but merely requested you to ask them whether they
could not liq u id a te some fu rth e r o f th e ir borrowings from your
bank, p o in tin g out t h e ir consid erable and in c rea sin g voltme o f
se c u r ity loans as one fa c to r to be discussed with them in i t s
bearing on the p resen t volume o f th e ir borrowings*
16*
17 .
Tou s ta te in your l e t t e r o f Bay 10th th at your d ir e c to r s doubt a s to
th e ir le g a l r i^ a t to refuse accommodation to a bank wishing
to re sto re i t s re se rv e s, s o l e l y on the ground th a t the d e Y ic it
in the reserve i s caused by in crea sin g d e p o sits growing out o f
s e c u r ity lo a n s.
The
B o a rd
any
has
o th e r
n o t
asked
p u rp o s e *
yo u
to
re fu s e
d is c o u n ts
fo r
th e
above,
o r
fo r
4.
•A
18.
Do you doubt your le g a l au th ority to refuse discounts to
replace reserves in cases o f d e p o sits a r is in g from
commodity sp e cu la tiv e loans?
19.
I f you have the above power as to sp ecu la tiv e commodity lo a n s ,
can i t he that you are pow erless w ith regard to stock
s e c u r ity loan s?
20.
I s i t not your r e a l p o s itio n that hanks, even in these abnormal
tim es, have the rig h t to borrow from you to make good
t h e ir reserves ag a in st d ep osits a r is in g from customers1
se c u r ity lo a n s , to any .-mount they may d esire , fr e e from
a l l c o n tro l on the p art o f your bank except that afforded
by increased discount r a te s?
21.
I f t h is i s good law, or good banking p r a c t ic e , does i t not throw
into the d iscard a l l s o -c a lle d f d ir e c t a c tio n " or p ressure?
22.
I f your p o s itio n i s c o r r e c t, what loans would remain on which your
bank could e x e rc ise "s c r u tin y and su p ervision " which you
s ta te you always e x e rc ise where abank i s borrowing too much
Or too fre q u e n tly ?
* r ?t, i929#
Bw roal problem U how to insure a reduction in the Federal aescrve
rat 3 from the p resent rate o f 5$ to
b efo re the expected
a g r ic u ltu ra l and business deoand a r is e s *
thei"e i s no question hut that sijocial&tivo se c u rity lo&uu h w e absorbed
so acush o f Federal Be serve c r e d it that business rates have been
increased*
t h is d iv ersio n o f Federal Be nerve c r e d it must he brought within bounds
before ar*y reduction can be made from e x is t in g Federal Hssarve
rates*
How
s h a ll we solve the problem?
5 « » fori: said on February 1 4 th , «• by in creasin g the rates
a ffiw a a tiT o ly from 6 to p o s s ib ly 9 $ , and then reverst* i t .
!Jhe Federal Uosevvt Sound sa id by using d ir e c t pressure under
the 5> rats*
•
I bo^.iovt' that the How York p lan , at that tim e, would n e c e ssa r ily cons m e
ti^ e in stoop ing the d iv ersio n o f fed era l a sse r ts c r e d it
then the plan adopted by the Board, and I b e lie v e that an increase
tut*! time to
would be a b so lu te ly n e g lig ib le in i t s re su lt*
Bic Board ht*s been so saoas agfu l in the p o lic y o f d ir e c t p ressu re,
however* that I b e lie v e a 6^ irate today would be a very iauoh more
potent fo r c e than i t would have been three months ago*
Because of the above, i t seems to no the question whether a b t rate
added to d ir e c t pressure w i l l more quickly so lv e the problem t^v»n
by d ir e c t pressure c io n s . I s a f a i r su b ject f o r study and i n v e s t !-
^aiioa*
I f we
t a p o lic y o f e a sin g b i l l r a te s , thus h elp in g b u r im ts
we w o u l d
of F V j - « . e r * * l
ss-; t e r i o l l y ,
d iv e r s
1 havr
iua
always
fo r
tb ii
a r is e
r e a s o n a b le
The
c r e d it
b ro a d
t#
tim e ,
and
• a m b le
os
th e n
to
to
such
th e
a
be
s h o u ld
rale*,,
in c r e a s e d
tie ,
th e
is
ra te
w h e th e r a n
e a s in g
d iv e r s io n
c o c a u e r e ia l
lo w e r
o f
p ap er
In
c r e d it
ra te .
p e n a lis in g
th a t
u
c r is is
provided there
is
be
a
a b le
w ith in
to
r e g u la te
to
b u s in e s s .
in c r e a s e
th e
u on
le a n s *
to
y e t
J u s tifie d ,
we
o p e r a tin g
s e c u r ity
adverse
w h ile
th a t
d e c id e d
th e
in to
s p e c u la tio n ,
re s to re
b e fo re
w ith
c o rre c t
re d u c e
w o u ld
b e lie f
u n d er
now
c o u p le d
t5u.t
primarily
ra te
c r e d it
s e c u r ity
fo r
th e n
Gfo
th e
p o s itio n
o f
action
g ro u n d
q u e s tio n
6 £ ,
and
such
*h e re
r e a s o n a b le
o f
the
ta .n n
c o r r e c tio n
liu v fi
R e s e rv e
b ill
i
to
in
d ie
b u s in e s s
m ig h t
flo w
d is c o u n t
s a a rtre t,
w ill
s p e c u la tiv e
ra te s
i* t
lo a n s ,
U.
iM d e r
t h e a»w c o n d i t i o n c r e e l e d h y d i r e c t n o t i o n , I
examine in to this whole crueition, with a view
an
to
g la d
to
illscovering
«<3ue oowuion i^rxjvmd on which on can : U.nd*
12*
My
c
in ion
no
to
the con d ition s e x is tin g on tfehrtkvty K t h i n
oMtsagoft*
13«
bother the (soiulitionsestieting on J’ohrukry 14th huve not eh&ngod
i « *i f a i r question f o r present eon*l&e r a tio n .
0 0 P Y
/
i
FiSDEiiAL xuvhiiiVE BANK OF a I’LaNTA
May 28, 1929•
The Federal tieserve Board,
Washington, D* C*
.
Dear Sirsi
Under date of May 7th, and 11th, I wrote
you in reply to your letter of May 2nd, in which you re»
vlowed bunking developments (as dieolosed in statements
of condition of 692 reporting banks) on February 6th and
April 24th*
jinco 1 wrote you Governor Black has written
a letter to oaoh of the larger banks in this Distriot which
were rediscounting with the Federal deserve Bark of Atlanta,
asking for specific information regarding their loans on
securities, and ho has received thirty replies*
,e are altogether pleased with the nature
of the replies and we believe that tlie infomation contained
in than bears us out in the statement that these banks are
using Federal reserve funds for oatanercial* industrial and
tgricultur&l purposes| and that they are in accord with the
policy of the Federal deserve Beard and of this bank* 'He
•will be glad to furnish you oopies of the letters from the
Unties if you desire them*
Very truly yours,
(3) Oscar Newton,
Jhairoan*
VOLUME 195
PAGE 84
C O P T
FEDERAL RESERVB BANK OF UBW YORK
May 31, 1929.
Dear Governor Young:
It is the belief of the directors of this bank that the Federal
Reserve Board policy of seeking the control of creditwithout an increase
in the discount rate and otherwise as generally understood, has created
much uncertainty throughout the country, and that the bringing of the
Federal Reserve Board and this bank into harmony with respect to a program
which will jremove uncertainty is essential to the restoration of confidence
and the development of a situation where a relaxation of credit in the
interest of the country as a whole may be more quickly permitted. They
believe that at the moment the agreement upon a mutually satisfactory
program is far more important than the discount rate.
For months the directors of this bank have voted a rate which they
have regarded as one that would be a more effective rate and that would
more quickly make lower rates possible. Their action has been disapproved
by the Federal Reserve Board. In view of recent changes in the business
and credit situation, we believe that a rate change now without a mutually
datisfactoiy progress might only aggravate existing tendencies.
With this in view, and in the interest of trade, Indus tyy, and
agriculture, we believe that it may soon be necessary
(1) To establish a less restrictive discount policy in order that
member banks may more freely borrow for the proper conduct
of their business.
(2) To correct the widely understood intimation of the Federal
Reserve Board, that collateral loans are hot a proper function
of legitimate banking.
(3) To be prepared to increase the Federal Reserve bank portfolios
if and when any read need of doing so becomes apparent.
The se steps may be necessary in order to restore business confidence,
permit of the reopening of a bond market, and to make funds more freely
available to finance our export trade, especially in agricultural products
at the time of crop movement.
Whether all this can safely be done without a firm rate control
policy we are prepared to discuss, but a longer discussion as to the discount
rate without a real understanding regarding a future program we regard as
futile. Our directors, therefore, refrain from rate action in the hope
that a general policy in which both we and the Board can concur may be
quickly determined.
Very truly yours,
(Signed) G. W. McGarrah,
Chaiiman.
Hon. R. A. Young, Governor,
Federal Reserve Board,
Washington, D. C.
VOLUME 1 9 $
PAGE 8$
STATEMENT PREPARED AND SUBMITTED PERSONALLT BY MR. CHARLES
E. MITCHELL DURING MEETING UITH THE FEDERAL RESERVE BOARD
ON JUNE 5, 1929.
1. Facts clearly Indicate the necessity for
•
•
(a) An increase in security borrowing between now and July 10.
(b) An increase in agricultural borrowing in the late summer,
(c) A readjustment of credits over July 1 by reason of dividend
interest and currency requirements and by reason of the proverbial
window dressing that will create a heavy strain especially in Hew York.
2. All this points to the definite necessity of increased rediscount
ing of member banks, and if such rediscounts become so excessively large
as to unduly tighten tne banking system, then such relief must come through
some release of Federal Reserve credit, through the purchase of bills,
or government securities, or both.
3. If such increase in rediscounts and Federal Reserve portfolios
leads to an undue Increase In loans either through giving an incentive to
security speculation, land speculation, trade inventory speculation or
agricultural product speculation, then a rate increase is justified,
peroapa severe! increases with always a willingness to reduce rates as
easier conditions justify.
4. This all involves a change of Reserve policy that should be
publicly understood but it must be made clear to the country, not through
an announcement Indicating that the desired goal of the Reserve Board
has now been reached and the deduction made by the public that “the lid
is off", but an announcement that the Federal Reserve Board and the
Banks are now in accord regarding facts and future program and indicating
that the Reserve System will during coming months, express itself through
the rediscount rate - always working toward the goal of sound business,
sound banking and ultimate ease of credit.
VOLUME 195
■PAGE 86
(Presented to & Approved by
Board of Jirecsors
June 6, 192a.
TMD&JUU BSSStlt BOX M JAM FKAHCISCO
(s) S. 0. urgent,
Secretary pro tempore)
/I
Board of directors,
Federal Heserve Brnk of Son Francisco.
Gentlemens
At our adjourned meeting held on May 9, a letter from the federal deserve
Board was presented, calling attention particularly to four banks that w e
mid had been steady borrowers and requesting the action ol this Board in
cooperating with the Federal Reserve Bo ird at Washington in whatever steps
were necessary to readjust the position of these banks. After discussion, you
will remember, it was thought best to refer the matter to tue Governor of
this brnk and to the Chairman of this Board, and to hove tnem report their
actions it the next meeting on May 16. As there was only one week between the
two meetings, little was accompli shed luring that time and further time was '
esked for. This being the next *ecting of tne hoard of directors, we present
herewith the results of our conferences.
Before presenting to you the history of the conferences that hnve taken
plr.ee since t ie 9th. of ay, #e should like to coll your attention to the
letter ritten by tne Federal Reserve Bo rd under date of February 2, our
answer thereto, and the action that was taken in regard to it. After receipt
of tne letter of February 2, your Governor mid Chairman had conferences with
the representatives of tne following San Francisco banks:
Mr. Bacigrluy 1 of the 3*nk of Italy National Trust
and Sowings Association,
U r . ) n m of tne American Trust Company,
vr. Lipaan of the Wells Fargo Bank and Union Trust Co.,
r. Avenali of tne Crocker First National Bank.
To these gentlemen was presented tne proposition that tney had been very
steady borrowers for the past ye~.r, and statements were snown them as to what
percents :e of time their banks had been rediscounting and as to what extent
their reserve had been used in tnis rediscounting.
Every one of t.iece four gentlemen presented the following reasons for tue
steady rediscounting:
In the first place, a very decided decrease in
deposits which was unexpected and unsens onal.
In the second pluce, a large portfolio o f bonds
waicn at that time and at the present time could
not be sold without material loss.
finch of them offered to sell their bonds and t ke the loss if «?©, as oi< leers
of this bank, made such a request.
VOLUME 195
PAGE 87
Th&t re aest your representatives declined
*
-
-2-
*
(
to make, not wishing to take the retrrontibility of forcing tne lose, but they
were told that in institutions of their size they should be able within a
reasonable time to ruake such readjustments as would persdt there to cancel tiieir
Indebtedness to t ds bank. It was t xe expectation that such reductions would
gradually c o m about and, in the cose of two banks, t »ey did materialize al
though one of them came bnck for a short time for as lar^e an amount as tney
had rediscounted before, but at the present titoe are not indebted to this bank.
On February 9, the American Trust Company was owing us $9,000,0 X), the Wells
Fargo Bank and Union Trust Company >7,700,000, the Bank >f Italy National Trust
and Sawings Association $30,250,000, and the Crocker First National Bank $6,300,000.
At the time of receipt of the telegram from the Federal Reserve Board
under date of arch 19, t'tie rediscounts of tnese various banks were at follows:
*
American Trust Company............. $7,500,000
Bells >'argo Bank and Union Trust
Company.......................
9,9)0, OX)
Bank of Italy National Trust and
Savings Association............. 34,500,0)0
Crocker Thirst National Bank..........
7,950,000
There had been little change in the rediscounts of these banks except that there
wrs a gradual reduction on the part of the American Trust Company, and under date
of April 5 tueir rediscounts had been reduced to $1,000,0 X). From that point,
however, they steadily increased again until under date of )‘ay 17 when the amount
wee $11,000,000, but on June 5 t ley were not indebted to this bank.
From March 19, the rediscounts of tne Bank of Italy National Trust and
Savings Association increased to >25,750,000 on April 4, from which point
there was a gradual reduction until feay 13 at whicu time they paid in full.
Since that date, they h.~ve rediscounted simply over nignt on four occasions and
for z tall amounts until June 4 when they rediscounted to tne extent of $11,250,000.
After our meeting of "ay 9, no conference was held with i.r. Bacitalupl at
bank had shown material reductions, their loans at that time being $ 8 ,0 0 0 ,0 0 0 .
Conference* were held with .Mr, Avenali and r. Lip'tan separately, representing
the Crocker First National Bank and the Welle Fargo Bank And Union Trust Company,
and I r. Avenali g~ve ue reason to believe that their rediscounts would be
materially reduced. At tnia time, t xey are >4,500,000,
r. Lip tan was impressed
witu the tnought that on ccoaut of their seasonal require:;ents their rediscounts
were more likely to be Increased than reduced. However, they h ve been reduced
from arch 19 to tne present tine from $9,900,000 to $7,100,OX). A letter
was written to vr. Drum, requesting tnat he make a statement regarding the
position of tne American Trust Co^any. This letter retained unanswered but
I f r . Drum personally called and gave little assurance as to a reduction in their
loans. Desiring a written answer from him, a second letter Vl s sent and tnis
was answrred by U r , i.oKee, Chairmen of tne Bo*-rd, who said:
t Md
MV# beg to acknowledge receipt of your favor of the
twentieth instant addressed to Ur. Drum, which refers to your
letter to hi* of the thirteen to, instant.
/
1 r. rum will be nway from San Francisco for if ifnort
time, but the writer understands that Mr. ')mm replied
verbally to your former letter.
In this connection, we beg to say that it is our in
tention to liquidate completely our borrowing's from tne
Federal Reserve Bank, and we expect tnat this will be ac
complished in the very near future.11
Since rec.ivliu: tile above letter from Mr. McKee, he has keut his promise and
at t ils time the American Trust Company does not owe anything to this institution.
At our earliest conferences with the representatives of these banks
reference ®as made by e-ch of them to their loss of deposits, end In referring
to condition report, filed on December 31. 1928 and K a r o 27, 1929, «e find that
reduction of deposits over that period of time had been about os followsAmericnn Trust Company.............. $18,000,000
Bank of Italy National Trust and
Savings Association........... 68,500,000
Cr cker First National Bank.......
5,500,000
#elle Fargo Bank and Union Trust
Company......................
9,500,000
or a totfil of $101,500,000 out of a total loss of deposits of member banks in
t?6
°5 ?J1? ,0°0 *000- ^The aiaounts
for the American Trust Company and
the Bank of Italy National Trust and Savings Association are total losses of de
posits in San Francisco and statewide branches, and should be snown as a whole*
for tne reason that all their rediscounting is done at this office.) As far as
\° a#e!ftsln#
^®p0#it* of these four
banks have changed
very little since the report of Wareh 27, and the anticipated increase in
deposits has not materialized.
Summarising the loans of these four institutions, we wish to call your
attention to the fret that on ‘’arch 6 they owed tois bank $ 6 1 ,0 0 0 .0 0 0 on A n ril
6 $56,800,000, on "ay 6 $37,000,000, and today, dune 6 , 015.M 0 . 0 M .
?
ThCr® is a fe?itur® in connection with banking in San Francisco which
differs, in our opinion, from any other section of the United States, and this
is known at deposit dumping” and is caused largely through difference of time
between tne Fast and the West, and aided through our free telegraphic transfer
system. The wire transfer facilities of the Federal Reserve System have
developed this new problem, or at le*st aggravated an old problem, of banking
on the Pacific Co^st which appears to be intimately related with the borrowing
practices of member banks in the city of San Francisco. This problem has been
briefly styled, as above, the problem of “Deposit dumping.” Deposit dumoinr
grows out of the differences in time between Atlantic Coast, Central, Mountain
and lacnic Coast points and the easy method of utilizing that time difference
which tne Federal Reserve wire transfer system provides. Banks in that part
of the United St-tes lying east of the Rocky Mountains, finding themselves with
a surplus of funds just before the close of business, can and do transfer those
funds to banks on the Pacific Coast (particularly Los Angeles) for deposit the
-4 -
p
transactJon bein^ completed well before the close of business on the Pacific
Coast. The j^cific lofjst broke -re in* fdlately faced witn the task of finding
profitable employment for taeee funis, a difficult taels in most ceses both
because of tae lateness of tae hour at which they are received -nd because
they ra*=y ue vlthdrrwn tne following sonting, In cities otm>r than 3an Franc!ee
tne problem is quite often solved by re-transferring the deposit to a bank in
San Francisco, tne financial center of the •rea. J n Francisco is, at present,
the end of tae deposit dumping trail, and tae dan Francisco banks can turn
to no one but the federal Reserve Bask lor relief. This they do, and this
is responsible for p rt of tne Jtore or lets continuous borrowing of certain
member banks in tne city of oan Vranclseo. If a dan Francisco bank is in debt
at tie Federal Reserve Bank vnen a late afternoon transfer of funis ie received
it can issued!'-tely a* ;ly those funis to its oebt at the Reserve Bank. If the
San Francisco bank ie not in debt at the Federal Reserve dank «:*n it receives
such a trnnsfer of funds, it a«y easily beco.no tae texrporsry holder of an
urnrofit ble deposit. k cone ton t abt X toe Federal deserve Bank of Stn
Francises provides the member banks of the city of $sn Francisco with a con*
venient aie^ns of corabx-tting the problem of deposit da^iping, fhet.er or not
so.me other means of combatting t .is problem esn or snould be davised, is an
open question waloh does not change toe present facts.
The amount of deposit dumping, however, does not necessitate the con
tinuous borrowing in the Irjrgo amounts thfit these four mentioned banka have
been in the habit of using, but a reasonable amount whlQh c-n be utilised to
overcome this tannin; 1 facility msy not be considered out of .lace.
Respectfully submitted,
(S)
Isaac B. Bewton,
Chairman of the Board
(S )
Wia. A . Day,
Deputy Governor.
\
2nd _______•
draft
{'■
\r
u
By C*S.H#
1. B»e firming policy of the federal Reserve System, which began
late in the year 1927, and the further statement in the federal Reserve
Bulletin released february 7, 1929. on the subject of speculative loans,
and the direct ction taken thereunder, have been most successful, federal
Reserve credit outstanding, coopering the averages for the months of January
and May, shoe a decline of 310 millions in May 1929 as against an increase
of 84 millions in May 1928. All this was accomplished without changing
the maximum Federal Heserve rate of 5<?.
2. The Board feels that the success of this experiment has demonstrated,
to use the words of the London Economist of May
11 , 1929 ,
p^a
4
and 5 ,
"®le fihal lesson is perhaps the most important.
i
tf® a* „1 ”a
8 t ? ek2 T
l
ee
a
” ^
f" * are only an ineffective deterrent which penalises the
ln”^ f rtthof trolling the guilty. The only^nedy
against rampant speculation is to cut off funds altogether.
rtsing, high
"The events of the past year have seen the beginnings
tftohni<*u6 *hich» if Maintained and developed, may
trader4"ln rationlng th* "peculator without injuring the
3.
The almost Spectacular decline in outstanding federal Reserve credit
has been accomplished by a decline in member bank reserves, and to a much
greater extent by gold imports and withdrawals of money from circulation,
Ihe federal Heserve policy has diverted these two latter forces from further
expansion into a liquidation of federal Reserve credit.
VOLUME 195
PAGE 88
2*
4,
At the time of the Board* s circular of February 7, 1929, a
majority of the Board felt that an increase in the discount rate to 5
would be&r heavily upon corxieree and business, without .affording any
certainty of relief from the increasing demands of speculative credit,
5* At the present time, however, conditions have so changed under
the operation of Federal Reserve policies, that t e time is nearly at
hand when there can be a reasonable incre se in Fed ral Reserve credit,
and a majority of the Board feels that this will afford a conclusive test
at to whether the existing
rate is a well-adjusted rate, or whether
.
rate increases should be made,
o* To apply this test, repxonahle increases in discounts should be.
penaltted, and further easing of the market should be brought about by
lower bill purchasing r tes,
7,
Should lowering of the bill rates result in increased holdings
of bills by the Federal Reserve System, and should the proceeds of these
bills be used merely to take down rediscounts, it would seem evident that
the 5-4 r^te is Justified. Should, on the other hand, the proceeds of
these bills be used as a basis of reserves against deposits arising out .
of increasing demand for loans, that in itself would seem to justify the
easing olicy as re, rde bills. Should, hovrever, added thereto, thore
arise further demands for rediscounts as a basis of reserves
ag
inst
£n
increasing demand for loans which seeus to be unreasonable and uncalled
for, the Board w ill be r -dy to meet the situation eith er by a resumption
of the olicy of direct p osr.ure upon member banks borrowing unreasonably,
by -n increase in lie count r tes, - whichever method Rill fford speedier
relief to agriculture a m business, - or by tlio use* of botit u etlode.
yiA«+< /p. i f
^ * L., ^
Roints for consideration In connection with basis
of Federal Reserve credit policy in the near future
and particularly in connection with the handling of
crop-moving crodit requirenxmta in the autumn.
1*
i’ho firm money policy pursued by the Reserve Uystom for
more than a year has resulted in a substantial Improvement in the
general crodit situation* the total volume of credit in use in the
country has expanded at a rate of about 4 per cent as compared with
the previous annual average rate of increase of about 7 per cent.
-his hue been accomplished without undue strain on credit conditions
affecting trade and industry.
2.
iJinco early February the money policy of the Federal Re
serve Jystem has expressed Itself primarily through what is called
’‘direct pressure** exerted aguinat member bank* making misuse of
Federal Reserve credit.
•'This policy has beta effective in reducing
the volume of borrowings from Federal reserve banks by some member
basics and in the case of others of checking their borrowings.
3.
'*Diroot
pressure," on the basis of recent experience may
be concluded to be a practicable technique in Federal Reserve bulk
ing practice in dealing with certain types of misuse of Federal Re
serve credit facilities by macaber banka.
Xt has not, however,
boon fully effective in all eases, nor does It appear that It cun be
fully effective, in the case of member banks whose condition is, to
speak practically, so unliquid as to make liquidation of the accomo
dation they have received from Federal reserve tanks necessarily a
slow process.
4*
Tills whole recent experience has daraonstrated. again that
the liquidity of the federal reserve basics is dependent to a large
degrou upon the liquidity of their member banks* when moatoer banks
use the resources of federal reserve banks to expand their security
loans on a considerable scale, they Involve the liquidity of the
federal Reserve System and thereby weaken it, for such lo^ns can not
be liquidated on a large scale by banks and in a brief period of
time without producing serious unsettlficaont*
The distinction between so-called "proper* uses and socalled "proper* uses of federal Reserve credit gets ite meaning
and its Justification as a principle to be observed in Reserve bank
ing from the fact that oertaln types of credit are liquid and certain
other types are not liquid In the sense of genuine economic liquidity*
5*
To safeguard pemunoatly the operation of the federal Re
serve System it is necessary that no departure from the principles
announced by the Roard February last with regard to the use of federal
Reserve credit be unnecessarily taken*
On the contrary, the method
of "direct pressure," it appears, will be a necessary element in
federal Reserve practice in the future as regards certain types of
misuse of credit*
^ployed in the recent past as a method of correcting un
sound banking conditions and practices, "direct pressure* will find
«ts status in the future as a means of preventing the development of
such conditions so far as the federal Reserve is related to than*
It will become a method of sanitation instead of deflation*
3
*2hm
*
position publicly tafcm by the Federal Reserve Board
February last m a
Umn
deliberately#
To
m e petition it holds
fast* It Is satisfied at once of the reasonableness, in the interest
of good federal Reserve bashing* of its position and of its necessity*
S*
it may be that rigid application of the Boardfs policy
will have to be suspended daring the period of the autumn credit reqairomouts* in order tis*t the trade and Industry of the country shall
not suffer.
To
this end it m y be necessary for Federal reserve
banks to permit member backs that have not found it practicable to
readjust their position in accordance with the Board’s principle* to
avail themselves of the rediscount facilities of tho Federal reserve
banks for such purposes and for such periods of ti e as the Federal
reserve baak m y deem to be essential*
7*
Any general easing of credit conditions is likely to re*
quire an increase in the total volume of Federal Reserve credit in
use* Uhe best and safest method of anconaliahla^ this during the
late sorrier and autasn period will be by the purchase of bills* All
things considered* the attitude of the Federal Reserve toward money
conditions will best be expressed by the bill rate during coming
months*
■
.
Skilful adaptation of a bill purchase policy to the trend
of conditions will enable the Federal Reserve to bring ease to the
credit situation where easing is necessary and with a minimum of
interference with the Board’s policy of discrimination against uses
of Federal Reserve credit for speculative loans*
j
,
.v
federal Beaervo jystom will probably be in the
6*
beet position after the autumn crop movement* are over to re
adjust its attitude toward the money market in accordance with
conditions that are more nearly norraul than any that have existed
for the past two years*
Whatever change in discount rate seem warranted or Jus
tified by underlying economic isid business conditions* if any*
can then intelligently be made*
'£he whole matter of the credit rate structure will be
one for prfcaury consideration at the autism Conference of Chairmen
and Governors of the Reserve bionics following the peak of cropmoving demands*
a t the same time the vfcole question of f e d e r a l R e s e r v e
prooedure with regard to credit technique and
c o n tro l
its future status definitely determined by the Board*
A *
0 *
June
K ille r
1 0*
1929*
should have
Jun^lO, 1929.
#
V 1•
Memorandum#
By C.S.H.
1* I assume that in the near future there will he no great increase
in gold imports, nor material withdrawals of money from circulation# (As .
to the latter the contrary seems to he indicated,)
2# I agree with Mr# Mitchell that Federal Reserve credit, - in the
absence of factors indicated in #1 above, - in the near future very
probably should be increased, such increase to take the form of bill
purchases (rates being lowered for this purpoee), rediscounts, and possibly
purchases of Government securities, — the latter primarily to meet unfore
seen emergencies#
3# While I have always been averse, on general principles, to
attempting to curb speculative stock activity through increased discount
rates imposed on agriculture and industry, I have never denied that, under
exceptional conditions, such action may become necessary#
4# Under any future conditions which may arise, the question to my
mind is as to which is the quickest way to relieve agriculture and business
from the strain caused “by absorption of credit into stock speculation# If
we reach the conclusion that the quickest way would be through increase in
discount rates, I should vote for such action. On the other hand, if I
felt that the quickest method of affording relief to agriculture and business
would be through direct action, I should not hesitate to use such method.
5. When the Board* s statement of February 5th was issued, I believed
that direct action would afford speedier relief, for I^Eoes that an increase
in the discount rate to 6fa would certainly bear heavily upon agriculture and
business, but would, in all probability, have little or no effect on security
speculative loans. I still am of that opinion under the condition existing
at that time#
6. I believe now, largely owing to the effect of this direct action,
that conditions have radically changed, and that an increase to 6$ at the
present time would have very much greater effect on member banks* borrowings
to support speculative loans than could possibly have been the case in
February of this year#
7# Should speculative activity in the stock market again become rampant,
I should examine into the matter with an open mind, free to choose what I
VOLUME 195
PAGE 91
*
2.
believe to "be the speediest approach to the relief needed for agriculture
and industry*
8* I believe that the policy of direct action may safely now be
suspended, as it has, for the time being at least, achieved its purpose
,
of reducing Federal Reserve credit,
0*4* U4L4+*
(yii
■*
*
9. On the other hand, I am not prepared to accept Mr. Mitchell's
suggestion that the Board definitely agree to confine itself to the
discount rate in controlling Federal Reserve credit during the coming
months*
10. I appreciate, however, that the policy of direct action has so
paved the way that if any emergency arises in the near future it may appear
that an increase in discount rates may be the speediest method of obtaining
relief, with the reasonable hope that lower rates may speedily be assured*
to the advancement of agriculture and industry.
Form No. lul -
O ffice Correspoi
To
Mr. Hamlin
From
Mr. Go 1dei
ence
FEDERAL RESERVE
BOARD
Date.___ June 11, .1929 .
Subject:,
I have read your memorandum of June tenth and find nothing
in it that is not in agreement with the facts.
It represents,
of course, on many points, the taking of a position and the ex
pression of a judgment and I did not understand that you wished
me to discuss that phase of it.
I think that your 2Io. 8 may he
misleading, because it appears to say that the object of direct
action was to reduce the volume of federal reserve credit.
As I
read the Board*s announcement and its policy, the object of direct
action was/in its narrowest terms; to reduce the amount of federal
reserve credit used in the support of security loans, amd^in broad
er terms to reduce the amount of bank credit used in security loans
by means of controlling continuous borrowers.
FEDERAL RESERVE
A '
C O N F ID E N T IA L .
O F NEW
BANK
YORK
«
June 12, 1929.
Dear Governor Young:
\
Our directors have considered with interest the. report of the dis
cussion which some of them had with the Federal Reserve Board on JUne 5# relative
to a possible program to handle present and prospective credit problems.
In the face of conditions as they now appear, it seems likely
(a) That there will be an increase in security borrowing through
out the country between now and -the early port of July.
(b) That there will be a large readjustment of credit over July
1 by reason of interest, dividend and currency requirements and
by reason of window dressing, that may create a heavy strain up
on the banks in financial centers, especially in New York.
(c) That there will be an increase in agricultural borrowing as
the summer advances*
With these facts in mind the directors, as they now view the si
tuation, believe in a general way
(a) Tbat there will be a necessity for an increase in the redis
counts by member banks in this district and that member banks must
be permitted to borrow from the Federal1Reserve Bank for the pro
per conduct of their business, regardless of the fact that they may
have substantial amounts of collateral loans outstanding.
(b) That if rediscounts required by the conditions above referred
to became so large as to cause an undue credit strain then the Fed
eral Reserve Bank might well be prepared, if necessary, to give
temporary relief through open market operations in bills, govern
ment securities, or both, as the occasion warrants.
(c) That if for any reason, whether through the release of addition
al Federal reserve credit through rediscounts, or through possible
later open market operations, or for any other reason, there should
be renewed evidence of an excessive demand for credit, due to specu
lation in securities or to speculation in land, building, trade in
ventories, or commodities, then the remedy of increased discount
rates should be applied promptly and vigorously in the interest of
sound banking and the ultimate ease of credit*
(d) That any such rate increase or increases, if required, should
of course be made only with the expectation that rates will be re
duced as promptly as conditions permit.
Our directors feel that it is difficult, if not impossible, definitely
to lay out any very specific credit program much in advance inasmuch as such a pro
gram might necessarily have to be changed in accordance with conditions as they de
velop. They believe, however, that if the above steps, designed to take care of mid
year and seasonal needs, are taken without the protection of a higher discount rate,
such as they have felt would have been desirable in order Aore quickly and safely to
permit of relaxation in credit conditions, the System must then be prepared to resort
to immediate rate action in the event of the possibilities pointed out above.
VOLUME 195
PAGE 92
/'j-o t i r t - i M r y t u ^aro©»*
.
(©) ure* -PF®£© ajjj P^ snr jiror-esro© jn srSxjcnj.pfn.Tr pOTjx^jirt? «e
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tGPaon oj, Mjjjjoik gx.cstajuCv *gsr.f
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(P) iU^-P -PP©3«5 MIJI pfc *7 f&tSifc tAgqVja.piJGTT^ OJ, GI^KTJC C>A«5> ItfjX
orrj: rpo
pr3£r4G83* waft «uq .#/<* eetjk fci/w: oj, ifij2i.»
p'k
gjgk Gzatr^p- &pogjji
rsb-
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tu
XP&f
49T9XO A T T T
£po £©gg
P©
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oj, cGugj^jojjg
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ffr
e e n n f c f j p A * }'O T . t . o
h j j
S
«w fpeX iro& gbboiri.4 J.p oogu* jji C/X
s boeajpje hnov^s-^ $o psugje bT.«aerr^ nwq
cj.cyj£ i>topja:<c#
c icrjoi? Mjjjsp some 0£ 19m peg MTJP .ppe ^eq^naT t<©s *i.aq
<«? ItfiJO s' :,f?jg.pjAe
Orrr. q?rac«oifi )tga© coirerqo^acr *?<£!*
ju« £&feo&£ uj, ppv* (£<*.Tlhis letter will in substance confirm what I told you on the
telephone on June 10, 1929, concerning the views of our directors.
jjo
Yoursvery truly,
(Signed) Geo. L. Harrison,
Governor
Honorable Roy A. Young, Governor
Federal Reserve Board,
Washington, D. C.
$
?he Federal Ke*erve Board ha* given further consideration to the q&estion
of future pro ran*
The Bo rd thoroughly re a liz e s that massy fa cto rs now unforeseen
may enter Into the credit situation during tue earning months.
believes that at t^e moment there i s
a
However, I t
p o s s ib ilit y of carrying out a program
fo r the future months without an Immediate r *ise in tne discount rate or, at
th is w riting, easing the situ ation either by the purchase o f b i l l s or Govern
ment secu rities*
Therefore, in on e ffo r t to develop a mutually satisfactory program, the
Board s u r e st® the following; fo r your consideration, with the hope that no
unforeseen developments w ill occur wnich w ill prompt anyone to change his p o sitio n :
Since February the policy o f the Federal deserve dysten has expressed
I t s e l f primarily through
what i s called "d ir e c t action* ami th is position was
tsken d elib erately by the Federal Reserve Board.
To th is po sition i t holds f a s t .
I t I s f s a t is f ie d with tae reasonableness of i t s policy and with I t s necessity,
even though the sethols end decree o f application may be con troversial.
The Board, a fte r
a
careful review of the cred it situ ation , f i n i s tnat the
increased*demand fo r credit
ti
meet rail-year requirements and also the credit
demands fo r early autunn w ill probably require member banks to increase th eir
rediscounts at the Federal reserve banks.
by a temporary suspension of a rig id policy
-"■ '
"""... ''
•*
This situation w ill be better served
f direct pressure, which, how*
--
„
- --
__
ever, should ngt be abandonedt but rather tempered in order to permit member
banks tnat have not found i t practicable to r e a l Just th eir position in accordance
with the Board1• p rin cip le , to avail themselves of the rediscount f a c i l i t i e s of
VOLUME 195
PAGE 93
McQarr»*v .........................2
ch e Federal Reserve bales f o r the purpose o f avoiding, as fa r as p o ssib le ,
any
undue
strain or
tm y
unnecessary increase in the cost o f credit in meeting
the seasonal needs o f a gricu ltu re. Industiy and commerce.
I f such rediscounts become excessively large so as to unduly ti^ ite n
the credit situ ation to a point whore i t acts
other
as & deterrent to business
and there are n o/im sa tisfaciory facto rs in the situ a tio n , r e l i e f should be
given throu^i some release o f Federal Reserve c r e d it, preferably througi
the purchase o f b i l l s , but i f i t should appear at the time that such r e l i e f
is not adequate or p ra c tica b le , then, the Federal Reserve Board would be
glad to give consideration to supplementing the r e l i e f through the purchase
o f sh o rt-tin e Government s e c u r itie s .
In suggesting th is program fo r the future
months, the Board is not
unmindful that a lim ited nxsaber o f member banks may expand undesirable
loans upon Fedora! Reserve cred it to a point which would not be Justified by
conditions and circumstances surrounding those in stitu tio n s, and in such
cases the Boc.rd would expect the Federal Reserve banks to resort to the
«/
usual d irect a c tio n .
Again, i f such increase in rediscounts and Federal Reserve p o r tfo lio s
_ .a_s to an undue increase In loans having the earmarks o f u»sound banking
practice in any great number o f member banks where d irect action can not be
a l l i e d simultaneously and quickly enough to protect the general credit
situ a tio n , the Board would bo glad to consider other corrective measures.
Bie Board would bo glad to hoar the views o f your directors a fte r they
have considered th is o u tlin e .
Yours very tr u ly .
R. A. Young.
Governor.
Mr, Gates W. MgQ&rrah. Chairman.
Federal Reserve Bonk,
New York C ity. N. Y.
expressed i t s e l f primarily through what It called "d ire ct pressure",
and th is position was token d e lib e ra te ly by the Federal Reserve Board.
To th is position i t holds f a c t .
I t i s sa tis fie d
by
tbs reasonableness
o f i t s p o licy and o f i t s n ecessity.
The Board, a fte r a careful review o f the credit situ a tio n ,
fin d s that the increased demand fo r credit to m*et mid-year requirements
and also the credit demands fo r th t early autumn, in order to avoid
taadue strain upon the banks o f the country, w ill probably require that
member banks increase th eir rediscounts at the federal reserve tan1* ,
he situation w ill be b ette r served b y a temporary suspension o f the
rl^ id p olicy of d ire c t pressure which, however, should not be abandoned
bu* rather should be tempered in order to permit member hanks that
have not found i t oracticeble to readjust th e ir position in accordance
with th - Board •t principle to av a il themselves of the rediscount
f a c i l i t i e s o f the Federal reserve banks fo r the purpose o f avoiding
any undue stra in , as w ell as riving ease in the cost o f credit to meet
the seasonal needs o f agricu ltu re, industry and cooineroe.
The discount rate o f 5
« r cent now in e ffe c t in the Federal
reserve banks should be retained for the present.
T f, however, the
rediscounts should become excessively large so as to unduly tighten
the credit situation to a point where i t acts as a deterrent to business,
r e l i e f should be given through some release of Federal reserve cred it,
VOLUME 19$
pAGE 9 $
v
.
p r e f e r r a b ly
a d v is a b le
th r o u g h
to
th e
s u p p le m e n t
g o v e rn m e n t
s e c u r it ie s ,
o n ly
f u ll
a fte r
I f
th e
m id - y e a r
r e d u c t io n
o v e r
th e
in
p u rc h a s e
th e
e a s in g
t h is
c r e d it
p e r io d ,
th e
p e r io d
and
p o lic y
o f heavy
by
in
seaso n al
th o
o f
any
s h o u ld
th e
a ls o
to
i t
r td u c e
a p p e a r*
o f
be
s h o r t-tim e
u n d e rta k e n
fe d e r a l H e s e rv e
s a t is f a c t o r y
th e n
r e q u ir e m e n t s
t im e
p u rc h a s e
c o n t in u e
s h o u ld
o rd e r
a t
p o lic y
s h o u ld
c o n s id e r a t io n
ra te
I f
A p p ro v a l
s it u a t io n
d is c o u n t
ill* .
s u p p le m e n te d
c o n s id e r a t io n
th e
o f h
be
th o
w hen
iv e n
co st
o ver
to
o f
B o a rd *
.
a
c r e d it
b o r r o w in g
is
u n a v o id a b le *
In
is
n o t
u n m in d f u l
re s e rv e
c r e d it
to
a d ju s t in g
c r e d it
th a t
to
c o n d itio n s .
b r in g
d ir e c t
n&
w h e re ,
S y s te m ,
i t
w as
use
o f
c a r r ie d
p o in t
H ie
F e d e ra l
re s e rv e
A c t,
s U c h m e th o d s
c o n tro l
th a t
th e
th e
o f
to
n o t be
in
w o u ld
w o u ld
th e
c o rre c t
in
m o n th s
in s is t
ju s t if ie d
in d iv id u a l
o f
lo a n s
th e
b y
th e
uoon
s u c h m is u s e
p o lic y
in c r e a s e
n o t
fu tu re
m ay
e xp e c t
e a s ie r
unsound
B o a rd
as
th e
w o u ld
w o u ld
c r e d it
th e
it
o rd e r
o f
e a rm a rk
F e d e ra l H e s e rv e
o f
B o a rd
in
fo r
m em ber b sm k*
id ie r e
because
S v id e n t
th e
p ro g ra m
c e r t a in
p re s s u re
cases;
banks
a
t h is
B o a rd
F e d e ra l
b y
e x is t in g
m em ber b a n k s
in
s p e c if ic
F e d e ra l B e s e rv e
b o r r o w in g
b a n k in g
p r a c t ic e
o r
h a ra o n y
w ith
p u rp o s e s
g iv e
th e
im m e d ia t e
e f fe c t iv e ly
c o rre c t
m em ber
in v o lv e d
o f
c o n s id e r a t io n
th e
th e
th e
to
s it u a t io n .
S U B JE C T:
R e g u la tio n
« M
To
A ll
Za
o f f ic ia l
h e re to fo re
o r
e ra l
is
re s e rv e
o r
fo r
s e rv e
B o a rd b a a
p r a c t ic e s
b a t
th a t
\ banks
a t te n t io n
th e
th e
It s
w hen
i t
a re
h as
a
c r e d it
and
g ra v e
m a in t a in in g
o f
and
o s
i t
r e s p o n s ib ilit y
s p e c u la t iv e
w as
w henever
s e c u r it y
banks
bank
th e
o f
o f f ic ia l
fo r
th e
F e d e ra l
o f ta n k in g
B o a rd
a t
n o t
c r e a tio n
H e s e rv e
its
Fed
s p e c u la t iv e
lo a n s *
to
th a t
to e
in te r fe r e
in v o lv e
th e re
lo a n s
la
A ct does
f a c ilit ie s
e x p la in e d
n o t
sad
He s e rv e
R e s e rv e
re s e rv e
p u rp o s e
a u t h o r it y
banks
F e d e ra l
r e d is c o u n t
tfc *
do
th e
F e d e ra l
a m b e r
fo r
s p e c u la t iv e
th e y
re s e rv e
th e
F e d e ra l
fo r
a sm s#
lo n g
th a t
th a t n
c la im s
e it h e r
to
F e d e ra l
P a lle t l a ,
th e
s ta te m e n ts
d is p o s itio n
so
a ll
fa c t
o f m a in t a in in g
o f m em ber b a n k s
i t
th e
re s o u rc e s
b o rro w s
le t t e r s
no
to
to
R e s e rv e
r e a s o n a b le
p u rp o s e
th o s e
1 is a b o r B a n k s *
F e d e ra l
s p e c u la t iv e
ta n k
C r e d it .
a d d re s s e d
th e
o f
w ith in
lo a n s
la
use
o f
n o t
im p r o p e r
B anka a n d
la
c a lle d
th e
e x t e n s io n
S y s te m
p re v e n t
le t t e r s
p u b lis h e d
c o a t o p ia te
I
to
fe d e r a l R e s e rv e
Hes e r v e
F e d e ra l
s ta te m e n ts
has
o f
a
is
w ith
F e d e ra l
e v id e n c e
th e
F e d e ra l R e
w ith
a id
o f
th e
lo a n
re s e rv e
bank,
th a t m em ber
F e d e ra l
re s e rv e
c r e d it *
bonks
c a ll
is
i
o f
to
F e d e ra l
R e s e rv e
B o a rd
th e
F e d e ra l
D e s e rv e
S y s ts m
b ro k e rs
o b v io u s
th e
s e rv e
th ro u g h
have
o r
o f
o f
th e
la r g e
o th e r
to e
th e
in v e s t m e n t
th e
banks
o f
re s e rv e
th e
lo a n a
fo r
ju n u s
bank
to
fu n d s
to e
p u rp o s e
X t a p p e a rs *
i.o s e v e r ,
o e iig ,
p a p e r fo r
and
to
c r e d it
e m p lo y e d *
t h is
bonds
fo r
and
th a t
th e
t im e
b ro k e rs
w h ic h
o r
b u t
They
i t
o f
s h o u ld
F e d e ra l r e
c o u n try *
o f any
p a p e r*
o fc t r a d i n g
n o te s
som e
on
f a c ilit ie s
u t iliz in g
o f
th e m
s e c u r it ie s ;
r e d is c o u n t
m em ber b a n k s *
o u t s t a n d in g
le n d in g
o f c a r r y in g
e xc e p t
is
so
b e fo re
s e c u r it ie s ,
.‘x t
to e
re s e rv e s
f o r b id s
th e
by
in v e s t m e n t
re c o u rs e
s u r p lu s
u ltim a t e
u sed
o th e r
re s e rv e s "
A c t e x p r e s s ly
been
o f e lig ib le
o f
p u rp o s e
h as
a t
th e
d e a le r s
In
in
th e
o f
b een ,
sam e
t h is
evaded
t im e
s to c k s *
bonds
s e c u r it ie s *
a b o v e - m e n tio n e d
r e q u e s te d
F e d e ra l
c r e d it *
th e
S ta te s *
o f c a ll
have
s u r p lu s
o r
n o t have
th e y
in v e s t m e n t
U n it e d
e m p lo y
" s e c o n d a ry
F e d e ra l re s e rv e
a m o u n ts
h e re to fo re
have
o th e r
d is c o u n t
In
has
o r
s h o u ld
o r
R e s e rv e
to
s t o c k s ,b o n d *
w h ile
fu n d s
o f w h ic h
bends
G o v e rn m e n t
I
in
c o n s t it u t e s
F e d e ra l
p ro c e e d s
p r o v is io n
y s ts m
s u r p lu s
c r e d it ,w h ic h
s to c k s ,
d e a le r s
R e s e rv e
t h e ir
The
th e
and
th a t m em ber b a n k s
F e d e ra l
u t ilis e
does not question the right o f member
The
th e
R e s e rv e
p u b lic
a n n o u n c e m e n ts
c o o p e r a t io n
% s te m
in
o f
th e
th e
th e
F e d e ra l
e lim in a t io n
F e d e ra l
re s e rv e
o f
.
such
R e s e rv e
B o a rd
banks and
abuse
o f
m em ber
F e d e ra l
2
w h ile
and
tfc o re
abuse
t in *
o f
has
th e
now
som e
The
r e g u la tio n
la
co n *
fe d e ra l
to
ra q u e s t h a s
t e
c a n tin a s *
p o tte rs
1929*
t id e
b aa
th e
w han
F e d e ra l
f ie s e r v e
o ffs e t
ta k e
is
p re p a re d
to
th e
t h is
c o r r e c t io n
o f
p r o m u lg a t e
and
to
r e g u la tio n
ab u se
e n fo rc e
h r
th e
is
s e c to r a l
banks*
fo u n d
m o re
r ig id
as
re s p o n s e
/a t
la
R e s e rv e
upon
p u rp o s e s
s te p s
t h is
.f e d e r a l
th e
abuse*
th e re fo re *
o f
o rd e r o f
f a v o r a b le
th e
in
o th e r
scan
has
o f
nay
th e
B o a rd *
p r o s u lg & t e d
b u s in e s s
be
tb a
th e re fo re ,
v o lu n ta r y
fe d e ra l
q u a r te r #
q u a r te r s
b u t w e s t e x e r c is e
o f
com nsaesm aat
such
o f
th e
su n b ar
th e
ta k e
a
th e
lo n g e r r e l y
B o a rd *
p r o v is io n s
th e
no
w ith
a t
in
o f
banks an d
to
and
u a ts t
c o m p e l c o m p lia n c e
a d h e re n c e
I f
Judgm ent
I t
re s e rv e
m e t w ith
d im in u t io n
it s
H e s e rv e
th e
th e
c o o p e r a t io n
la w f u l
A c t*
u n c lo s e d
on
n e c e s s a ry
to
com pel
s t r ic t
r e g u la t io n *
to
be
i n a d e q u a te
re s e rv e
and
c r e d it *
d r a s t ic
fe d e ra l
b r in g
ab o u t a
B o a rd
is
r e g u la t io n s *
re s e rv e
S a lt e r
to
th e
L*
S e c re ta ry *
B o a rd *
B ddy*
f u ll
p re p a re d
to
R E D ftS A L R J g s m s
H X G U U . T IO * K ,
L oans,
fo r
D is c o u n t*
o r
M eaber B anks
D e a le r s
in
S S R IS S 0 7
o th e r
h a r in g
S to c k s ,
BOARD
C r e d it
Loan*
B onds,
o r
1 9 2 9 .
A c c o m o d a t io n s
to
B ro k e rs
o th e r
o r
In v e s t m e n t
S e c u r it ie s ,
K x e e ft w ith
no
F e d e ra l
d ra ft
o r
o r
R e s e rv e
h
ill
p u rc h a s e
g o v e rn m e n t,
has
to
o r
o t h e r w is e
n e g o t ia t e
(o th e r
U n it e d
acco u n t
lo a n s
o r
fo r ,
fro m *
to
any
in ,
hoods
e it h e r
and
fo r
o r
f ir m
lo s s
o f
It s
o r
th e
o th e r
a t
th e
o r
o f
fo r
I t
s e ll,
in v e s t m e n t
g o v e rn m e n t
th u s
c o r*
t a s la e s e
p u rc h a s e ,
ow n a c c o u n t
to ,
o r
re p u rc h a s e
p a r t n e r s h ip ,
to
n o te ,
o r advance
p r in c ip a l
o r
B o a rd ,
a c c e p ta n c e s ,
(u n d e r
,
w hose
o f,
h ead s,
n o te s
h is
any
s e c u r it ie s
s a le s
s to c k s ,
a e s e rv e
r e d is c o u n t a n y
h o n k e rs *
p e rs o n ,
o r
F e d e ra l
o r
a n y m e m b e r h a n k w h ic h
a s s o c ia t io n ,
th a n
th e
o r s ta k e
exch an g e,
p u rc h a s e s
o th e rs .
o f
d is c o u n t
o r s m a ic ip a l
d e a l
s ta te s )
o f
s h e ll
o f
o t h e r w is e )
com pany,
ie
it ie s
h ills
S ta te
o u t s t a n d in g
p e r & t lo n ,
p a x m ls e le n
B ank
o f exchange
any
a g re e m e n t o r
th e
s e c u r
th e
th e
IK S B m s .
A ct
o n *
o f
th e
la
to
p re v e n t
th e
S ta te s
to
f in a n c e
d e a lin g *
V H S K iZ d S *
re s e rv e
to
bank
c a rry
bond* and
th e
to
o r
tra d e
n o te s
R e s e rv e
p a p e r
to
fo r
A c t
and
th e
th e
a p p e a rs
Is
b e in g
th e
th e
e lim in a t io n
o f
m t3R & S*
c o m p le t e ly
p o w e rs
to
o r
th a t
in
a t
F e d e ra l
sam e
R e s e rv e
y s te n
an d
h as
sons
have
has
h as
s e c u r it ie s ;
F e d e ra l
been
s e c u r it ie s *
p r o v is io n
e lig ib le
need
e x c e p t
la r g e
t h e ir
o f
a m o u n ts
and
th e
Fed*
c o n s e r c la l
in v e s t m e n t
banks
re s e rv e
been
any
h ave
h e re to fo re
re s e rv e
F e d e ra l
c o o p e r a t io n
t h is
o th e r
r e q u e s te d
R e s e rv e
U n it e d
S ta te s ;
o f
t in e
and
h o a rd
fe d e ra l
o f
in v e s t m e n t
d is c o u n t o f
bonds
th e
abase
w h ic h
p u rp o s e
o f
sudd
f o r b id *
U n it e d
th e
in v e s t m e n t
e x p r e s s ly
th e
th e
s to c k s *
F e d e ra l
o f
p ro c e e d * o f
th o
by
th e
;> a d o t h e r
o th e r
th e
evaded
o f
re s e rv e s
lo a n e d
s e c u r it ie s ;
c a lle d
t h is
m em ber b an ks
v o lu n t a r y
o f
c o o p e r a t io n
in
c r e d it ;
o b t a in e d
b u t
th e
abuse
h as
n o t
it s
la w
e l i m in a t e d ;
v g s m s *
fu l
A ct
th e
bonds
ta n k
bond*
R e s e rv e
p a p e r*
w h ic h
a t t e n t io n
F e d e ra l R e s e rv e
c lo c k s *
an y
i t
th e
been
In
u ltim a te
G o v e rn m e n t o f
d e a le r s
bH JK R E dS *
to
th e
a to c k a *
m a tc h e r b a n k s
b ro k e rs
n a tte r
in
o f
fu n d a m e n ta l p u rp o s e s
o f
F e d e ra l
d is c o u n t
VHSEZAS*
o ra l
ua#
i t
new
s e a rn s
n e c e s s a ry
c o m p e l c o m p lia n c e
w ith
fo r
th e
tb s
B o a rd
p u rp o s e s
o f
to
e x e r c is e
th e
F e d e ra l R e s e rv e
A c t;
B O f*
by
a d o p ts
T
eaGmeaeoeeat
K
B
K
I f
promulgates
end
o f
b u s in e s s
R SS0LTJ8D
th a t
th e
F e d e ra l R e s e rv e
following regulation*
th e
on
to
ta k e
B o a rd h e r e
e ffe c t
a t
1929;
X B D S B A L B M S H fS
mmAnaB
mass of 192» .
k*
/
boons*
fo r
D is c o u n ts
bom ber
D e a le r s
in
o r
o th e r
C r e d it
B a n k s h a v in g
Loans
S to c k s *B o n d s *
o r
p e r m is s io n
th e
A c c o e m o d s t io a a
to
B ro k e rs
o th e r
o r
In v e s t m e n t
S e c u r it ie s *
E x c e p t w ith
no
th e
F e d e ra l R e s e rv e
n o te *
d ra ft
advance
to *
o r
b ill
o r
p u rc h a s e
a c c e p ta n c e s ,
(u n d e r
back
o r
a t
o f
o r m u n ic ip a l
t im e
has
p r in c ip a l
b u s in e s s
s a le s
o f*
p u rc h a s e *
o r
it s
o r
o f
o th e r
th e
an y
S ta te
p a r t n e r s h ip *
bonds*
o r m ake
g o v e rn m e n t*
a g re e m e n t o r
i t
in v e s t m e n t
ow n a c c o u n t
o r
fo r
is
com pany*
to
s e ll*
lo a n s
o r
o r
n e g o t ia t e
(o th o r
s ta te s )
o f
p e rs o n *
a s s o c ia t io n *
th e
acco u n t
m em ber
say
p u rc h a s e s
s e c u r it ie s
th e
o r
s e c u r it ie s
an y
to
o t h e r w is e
U n it e d
le a n
b a n k e rs 9
o t h e r w is e ) f r o m *
c o r p o r a t io n *
g o v e rn m e n t o f
exchange*
o u t s t a n d in g
B e a rd *
r e d is c o u n t s a y
o f
shone
n o te s
fo r*
o r
b ill#
th e
to
F e d e ra l R e s e rv e
d is c o u n t
exchange
f ir m *
o r
o f
s h a ll
any
re p u rc h a s e
w h ic h
B ank
o r
d e a l
in * s t o c k s ,
th a n
bonds and
e it h e r
o th e rs *
fo r
h is
th e
FEDERAL RESERVE BOARD
W ASH IN G TO N
A D D R E S S O F F IC IA L C O R R E S P O N D E N C E T O
TH E FED ERAL RESERVE BO A R D
X-6370
September 4, 1929.
SUBJECT:
•
Report of Committee on Redemption
of Canadian Currency,
Dear S ir :
There i s attached hereto report sub
m itted by the committee appointed by the Fed
eral Reserve Board to determine the most e f
fic ie n t and economical means of e ffe c tin g the
redemption o f Canadian currency. Before taking
action on th is report the Board would lik e to
be advised whether or not the program outlined
therein w ill be sa tisfa c to ry to your bank*
Youfs Very tru ly,
E. M. McClelland,
A ssistant Secretary.
Enclosure.
TO GOVERNORS OE ALL F. R. BAMS.
VOLUME 195
PAGE 113
COPY
X-6370-a
September 4, 1929
REPORT OF COMMITTEE ON
REDEMPTION OF CANADIAN CURRENCY
To the Federal Reserve Board,
Washington, D. C.
Dear S ir s :
The Committee appointed to determine the most e ffic ie n t
and economical means of e ffe c tin g the redemption of Canadian cur
rency begs to transmit herewith i t s recommendations:
(a)
That a l l Federal Reserve Banks o ffe r their
f a c i l i t i e s to member banks for the c o lle c tio n
and conversion of Canadian currency into United
States currency at the current rates of exchange,
(b)
That the Federal Reserve Banks absorb the cost o f
shipping Canadian currency from the member banks
to th e ir respective Federal Reserve Banks but
that they deduct an allowance to cover shipping
charges, i f any, from the Federal Reserve Banks
to the points o f conversion into United States
currency,
(c )
That a l l Federal Reserve Banks send a circu la r,
sim ilar to the attached d ra ft, to th eir member
banks sta tin g the tenas upon which Canadian cur
rency w ill be received,
(d)
That the Federal Reserve Board and each Federal Re
*
serve Bank and Branch simultaneously give to the
X-6370-a
—2—
press copies of the attached circular announcing
terms under which the Federal Reserve Banks and
Branches w ill receive Canadian currency.
With respect to the procedure under which Federal Reserve
Banks and their Branches w ill handle the c o lle c tio n and conversion
o f Canadian currency, the Committee suggests that the Federal Re
serve Banks and Branches ship Canadian currency direct to the
Detroit Branch of the Federal Reserve Bank of Chicago fo r conversion
and c re d it, or make such other disp osition thereof as conditions in
their d is t r ic ts warrant*
The Committee "believes that i t is impor
tant that each Federal Reserve Bank employ the most economical means
o f conversion.
The Committee also suggests that Federal Reserve
Banks permit member banks to include Canadian currency in their ship
ments of United States currency provided both kinds o f currency are
properly segregated within the package.
The Committee believes that the Federal Reserve Banks should
not at this time o ffe r th eir f a c i l i t i e s to member banks fo r the col
le c tio n and conversion of Canadian coin.
Your Committee has considered the d e s ir a b ility of a pos
sib le arrangement with the Canadian Government or the Canadian banks
which would provide fo r the exchange of United States and Canadian
currencies at par.
While in theory much may be said in favor of
such a plan, i t appears to be inadvisable to endeavor to exchange
Canadian and United States currencies at par without makipg sim ilar
arrangements to maintain exchange a t pa rity between the tpo countries,
a subject which your Committee does not have under consideration.
R espectfully submitted:
(S)
E. Xi. Snead
Wm. R. Cation
J . E. Crane
X-6370-ar-l
SUBJECT:
Canadian Currency*
To Member Bank Addressed:
Enclosed herewith i s a statement which the
Federal Reserve Board and the Federal Reserve banks
and branches have given to the p ress, r e la tin g to the
conversion into U. S. funds o f Canadian currency spent
in th is country.
In accordance with this statement, you may
include Canadian currency in your shipments o f U. S.
Currency provided both kinds o f currency are properly
segregated within the package.
Credit fo r such currency w ill be given fo r
it s face value and when the cost of conversion into
U* S. funds i s determined, which should generally
average lo s s than one per cent, such cost w ill be
charged to your reserve account.
•
•
f
X -63 7 0-a -2
COPY
PRESS NOTICE
SUBJECT:
O ii^
Canadian Currency
The Department o f Commerce has called the -attention o f the
Federal Reserve Board and the Federal Reserve Banks to the fa ct that
Canadian tou rists traveling in the United States have at times been
charged excessive rates o f discount on Canadian currency, such rates
having ranged as high as 10 and even 20 per cent, at places remote
from the border.
The Department stated that these excessive charges have
resu lted in a fe e lin g of resentment on the part of Canadian tou rists
travelin g in th is country* e sp ecia lly as United States currency is
generally accepted at par by merchants in Canada, and asked the Board
whether something could not be done by the System to do away with ex
cessive discount charges on Canadian currency spent in th is country.
The Federal Reserve Board has taken the subject up with the
Federal Reserve Banks and they have agreed to o ffe r their f a c i l i t i e s
to member banks fo r the c o lle c tio n and conversion of Canadian currency
into United-States curroncy at the current rates of exchange. Further
more, the Federal Reserve Banks w ill absorb the cost o f shipping Can
adian currency from the member banks to th eir respective Federal Reserve
Banks but w ill deduct an allowance to cover shipping charges, i f any,
from the Federal Reserve Banks to the points of conversion into United
States currency.
The_Board fe e ls that i f member banks cooperate in th is matter
by extending a sim ilar service to their customers, Canadian to u rists
travelin g in th is country w ill fin d American merchants w illin g to ac
cept Canadian currency a t or near par. During the past three years
the cost of conversion o f Canadian currency into United States funds,
including both the exchange and the shipping charges, has averaged
le s s than 1 per cen t.
V
#
COPY
X-ftt
Memorandum from Mr. Parry to Mr. P la t t .
Subject: A rticle in Boston Globe
Sept. 1 , 1929, by flra. T. Yetman
This seems to me to be an in terestin g piece of s t a t i s t i c a l
a n a ly sis.
^
v
'
Granting the assumptions upon which the a r tic le proceeds,
the reasoning seems to me to be sound enough.
Some o f the assumptions, however, seem to me to be fa r from
r e a lis t ic and others are open to the criticism that they much overstate
reasonable p r o b a b ilitie s .
With special reference to the c a ll money that i s now on the street
fo r account o f lendings other than banks— an amount close to $ 4 ,7 0 0 ,0 0 0 ,0 0 0 assumption seems to be that the lenders of a l l of these funds regard them
as deposits and would withdraw them only to increase d ep o sits.
As a matter
o f f a c t , we know very l i t t l e about the source o f these loans or the
d isp osition which the lenders would make o f the funds i f they were not being
len t on the s t r e e t .
I f they are on the stre e t pending disbursement, fo r
p a y ro lls, supp lies, e t c ., th eir withdrawal would probably be accompanied by
a growth in d ep osits, but to the extent that they are held on the street
pending investment, th is would clea rly not be the case.
Punds now len t by
investment tr u s ts , fo r example, f a l l in this la t t e r category.
Determination
by the lenders o f these funds to put them into se cu ritie s would amount in
e ffe c t to the use o f the loan to purchase the co lla te r a l behind i t , or
perhaps 80 per cent o f th is c o lla t e r a l, with no increase i.n deposits at a l l .
How
these funds are d i v i d e d as b e t w e e n t h e s e
seems to me,
VOLUME 195
PAGE 122
a n y b o d y * s guess.
two c a t e g o r i e s
is,
it
. V
-
TO GENERAL FILES
%
September 9 , 1929
(
Member banks in debt to F. B. Bank
80 per cent or more o f the time during
the quarter ending June 1929
^
Federal Beserve Board
Mr, Smead
'
Reports received from the Federal reserve banka for the second quarter o f
1929, covering member banks borrowing from Federal reserve banks 80 per cent o r ^ j
more of the time during the quarter, show considerable increase both in number
o f banks and in average borrowings over figures reported for the f i r s t quarter.
The liquidation by the Federal reserve banks o f a substantial portion o f their
holdings o f acceptances and U. 8 . se cu ritie s may account in f*art for the fa ilu re
o f some o f the continuous borrowing bank3 to liquidate th e ir indebtedness during
the f i r s t quarter.
1
Second quarter 1929, A to ta l o f 2,299 banks were reported as borrowing 80
per cent or more o f the time during the second quarter as oomparea with 1,667 banks
in the f i r s t quarter, the average borrowings o f the 2,299 banks being $766,000,000
or 79 per cent o f average borrowings o f a l l member banks. The 2,299 banks that
were borrowing 80 per cent or more o f the time includes 1,528 that were borrowing ,
continuously during the nuarter. The average borrowings o f these 1,528 continuous
borrowers were $416,000,000 or 43 per cent o f the to ta l borrowings o f a l l member
banks.
Year ending June 5 0 . 1929. A to ta l o f 1,114 banks were reported as borrowing
80 per cent or more o f the time during the year ending June 3 0 , 1929, as compared
with 925 during the year ending Liaroll 31. The average borrowings o f tne 1,114
banks during the quarter ending June 1929 were $ 5 4 5 ,0 0 0 ,0 0 0 , or 56 per cent o f the
to ta l borrowings o f a l l menber banks. Of the 1,114 banks, 309 were oorrowing con
tinuously during the year ending June 1929, and the borrowings o f these 309 banks
aggregated $119,000,000 during the second quarter.
The d e ta ile d report© o f each Federal reserve bank are attached h ereto , and
summary fig u r e s by d i s t r i c t s fo r both the f i r s t and second quarters are shown in
the attached ta b le .
Following i s a summary fo r the system as a whole fo r the
second q u a rter.
/•
_____________
__________Second quarter 1929
A ll member banks
Banks borrowing
continuously
Banks borrowing 80
per cent o f time**
Banks borrowing le s s
than 80 per cent o f
time
•
Per
Per
cent
Borrowings
Humber cent
of
of
to
ta l
to ta l
100
100 $972,000,000
8,707
Humber
8,707
Year ended June 30,19
Pe
Per Borrowings
cen
in
cent
of
Second
of
tot
t o ta l Quarter
100 $972,000,000 10
4
119,000,000
1
1 ,1 1 4
13
*5 4 5 ,000,000
5
7 ,5 9 3
87
1,528
18
416,000,000
43
309
2,299
26
766,000,000
79
6,408
74
206,000,000
21
•
427,000,000 $ A
•This fig u re is based on reports submitted f o r second quarter o f 1929 and does noi
-
include borrowings o f any member banks that were not in debt to Federal reserve
banks 80 per cent o f time during the q u arter, even though they were in debt 80
per cent o f the time during the year.
••Includes banks borrowing continuously.
VOLUME 19 5
PAGE 143
TO GENERAL FILES
A ll
Banks borrowing continuously
m e rn b e r b a n k s
Banks borrow: ng 80^ of time*
Federal
Num ber
Reserve
1
'R u n lr
a r.
June
31
7D
Boston
New York
Philadelphia
*K>7
Cl^Blland
Richmond
Atlanta
811
5*40
*4*4*4
Chicago
S t. Loui s
Minneapolis
938
778
*4 0 8
939
776
807
1
Borrowings
2nd
1st
quar- qua rter
ter
60
232
250
87
9U
91
9*4
537
80
*42
**36
5*+
66
1.239
586
712
1229
580
173
• *41
126
700
13
919
9 1?
766
2*4 ,
18
68
Kansas City
Dallas
San Francisco
765
619
617
Total
8 .758 8,707
Percent
of total
100
100
*
56
50
17
Ifumber
2nd
1st
quar- quarter
ter
72
127
193
113
153
2*49
Borrowings
1st
2nd
quar- ! quarter
ter
1
31
1*40
73
10*4
*3
70
21
12
6*4
3**
102
15*4
58
218
62
77
I
233
**7
1*41
198
36
51
51
33
5
213
10*4
6*4
16 2
26
101
8
162
65
377
19
2
21
47
*4 2
39
12 1
51
71
3
19
1091
1.528
377
*416
100
100
i 12.5
17.5
**2.3
*42.8
33
18
2*4
12
52
60
65
67
13
16
lU
25
106
31
**5
26
23
1*4
3
1
13
17
16
28
33
23
12
2
-
3
l
6
13
2
6
63
155
95
109
17
9
56
37
17
*40
1.667 2.299
6*47
766
26 1
309
78
72.5
78.8
3.0
3.5
8 .7
25
59
19.0
26.*4
1
8
6
23
1
y e a r
20
__
20___
*4 0
99
179
217
63
102
1**8
136
10
*7
59
28
39
**3
55
130
82
31
U
OF
BANK
O P E R A T IO N S
—
•A
V lit
{•
V
\
6"8
22
**3
7
10
25
**3
7
19
7
22
20
30
5
52
2*4
1*
533
5*5
119 925
i
12.2 10.6
S s m v B E B 7, 1929
—
87
i . n
1 2 .8
•includes banks borrowing continuously.
.
••Figures based on reports submitted for first and second quarters of 1929 and do not include borrowings of any
banks not in debt to Federal reserve banks 80 per cent of time during quarter.
D IT IS IO li
22
33
73
*4*4
,
—
76
10*4
I
June
113
80
10
M a r.
105
116
106
1
10
June
6 *4
*4
-
8
22
972
155
13*4
153
8*4
1
B o rr o w in g s
__ 3 1 —
3
1*4
9
-
80^ of time
Num ber
M a r.
June
85
7
892
2*4*4
81
B a n k s , b o r r o w iii *
e n d e d ------------------, j e a r e f f i f f l M L -
L a __
103
75
55
38
*4*4
1*46
167
B o r r o d Lng c o n t in u o u s ly ]
B o r r o w in g s
year
Number
Borrowings___ ___ qnded______
2nd
1st
I
Mar.
June
M a r.
quarquarter
ter
31 . 3 0 ,■■■
157
115
235
298
?6
*7
L
266
50
37
*48
30
10*4
110
109
lU ?
Number
2nd
1st
quarquarter
ter
Banks
59.8
m em ber
5
56.1
/H i
September l6,
1929
/
To:
Governor Young
From:
Mr. Goldenweiser
SUBJECT:
Effects of security purchases.
I transmit herewith a memorandum prepared by Mr. Hiefler, in which he
presents an analysis of the effects of large-scale security purchases by the
reserve banks on the credit situation,
it must be borne in mind that at no
j
time was the situation entirely dominated by the system’s open-market opera
te
tions.
There were always other factors either reinforcing or counteracting
v
the effects of the purchases of securities.
In the three periods described,
security purchases have in each case been accompanied or followed by a de
crease in money rates, a rise of security prices, and an expansion of bank
credit..
in either
These developments, however, were much more accentuated in
1922
or
1927.
1 9 2 I+
than
*1 believe that the principal reason for that is that
member bank indebtedness was much larger in
1922
and in
1927
than in
1 9 2 U,
when
discounts for the system were down to $200,000,000 and when New York City banks
were entirely out of debt.
It is when money placed in the market by the reserve
banks through purchases is not used to pay up indebtedness but is incorporated
in member bank reserve balances that purchases have the greatest effect.
At the
present time, with discounts around $ 1 ,0 0 0 ,0 0 0 ,0 0 0 , security purchases, in
order to nave an important immediate influence on money rates, would have to be
on an extremely large scale.
On the other hand, as an indication of a reversal
of Federal reserve policy of restraint the purchases might and probably would
give a strong stimulus to speculation.
It might also be noted that large-scale
open-market operations on earlier occasions were always undertaken at a time
when business was slackening or going through a pronounced recession, while at
the present time business continues to be in record volume.
VOLUME 195
PAGE 149
September lH,
To:
1929
Mr. G-oldonwciscr
From: Mr. Bicfler
SUBJECT:
Security purchases.
Tliero have been throe periods since 1920 in the history of the reserve
system when it has embarked upon a program of security purchases amounting
to $100,000,000 or more, namely, from January to June,
1923 to November, I9 2 U, and from May to December,
1927
1922
.
, from November,
The increase in
security holdings in these three periods were $3 5 3 *0 0 0 ,0 0 0 , $5 0 5 ,0 0 0 ,0 0 0 ',
and $315»000,000, respectively.
All throe periods were accompanied by de
velopments which subsequently induced the reserve system to dispose of a
large part or all of the securities which had previously been purchased.
In all three periods, also, other influences wore at work which either
accentuated or offsot the effect in part of these purchases.
In the fol
lowing analysis of these periods the net effect of changes in these other
factors (gold stock, Treasury currency, changes in reserve bank acceptances,
float, etc., money in circulation, nonmember clearing balances and unex
pended capital) is measured.
January - June, 1922
From January to June, 1922 the reserve banks purchased United States
securities to the amount of $353,000,000.
At the sane time since gold im- /
ports were arriving in volume and currency was returning from circulation,
tne effect
01
other factors was to accentuate these purchases by $2 2 5 ,0 0 0 ,0 0 0 .
Total accessions to themarket consequently amounted to $632,000,000.
Of
this amount $ 5 2 5 ,0 0 0 , 0 0 0 was absorbed by liquidation of discounts at the
reserve banks and $ 1 1 3 ,0 0 0 , 0 0 0 went into increased reserve balances of memoer banks.
The liquidation of discounts reduced member bank indebtedness
from $962,000,000 in January to $^37,000,000 in June.
-
2
~
Changes in money rates, etc., which accompanied this movement are
shown on the following table.
In the case of exports and imports, the table
shows the change between the average monthly exports or imports during the
period and the corresponding period of the preceding year.
In the case of
common stock prices, the table shows, in parenthesis, the percentage increase
during the period as well as the number of points changed.
TABLE I .
January, 1922-June, 1922
January
1922
Money rates:
Call loans, renewal
Time loans
Commercial paper
Customers (weighted average)
1+.52
3A -5
3 /U
k
k
6.02
June
1922
Per cent
3-72
b l/k
k l/k
5 M
Change
- .80
- 1/2-3A
- 1/2
- .56
Bond prices (S.S. Co. 6 0 bonds)
Stock prices (S.S. Co. HlO stocks)
89.3
92
5 S.7
68.0
+ 3-1
+ 9 . 3 (+165 O
Total loans and investments of all
member banks 2 /
$ 2 3 ,1*82
$2U,182
+
$700
+
17
International trade:
Change as compared with same months
in preceding year in:
Exports (monthly average)
Imports (monthly average)
1/
2/
1/
.k
•
1
Percentage change
Measured to the nearest call in millions of dollars
In millions
/
1/
- 3As the table shows, money rates declined and bond prices rose in response to
these accessions of funds to the market.
Stock prices also advanced by l6 per
cent and member bank loans and investments increased by $700,000,000.
The
response of foreign trade was less consistent, exports during this period
averaging $ 1 1 9 ,0 0 0 , 0 0 0 less per month than in the corresponding month of
and imports aveiaging $17,000,000 more.
1921
Both of these reflected business more
stiongly than credit developments - exports having been exceptionally large in
the first half of
1921
and imports small.
192U
From November,
000
01
1923
to November, I9 2 U the reserve banks purchased $505,000,
United States securities, which together with $355,000,000 from various
other sources (chiefly gold) placed $ 8 6 0 ,0 0 0 , 0 0 0 at the disposal of the money
markets in all.
Of this amount $571,000,000 was absorbed by a decrease in dis
counts and $28'9,000,000 was added to the reserve balances of member banks.
In
this case discounts for member banks decreased from $799,000,000 in November,
1923 to $228,000,000 in November, I9 2 U.
tions are shown in Table II.)
(Accompanying changes in credit condi
-
4
-
TABLE II
November,
1923
~ November, 1924
November
____ ™ ..... ■i"—" 1923
Money rates:
Call loans renewal
Time loans
Commercial paper
Customers (weighted average)
Bond prices ( 6 0 bonds S.S. Co.)
Stock prices (4l0 stocks S.S. Co.)
Total loans and investments of all
member banks 2 /
4.80
5-5
i/s
5
5.60
November
1924
Change
2.42
3 i A - 3|
3 iA-3i
4 .7 s
- 2.38
- l f -1 5 / 8
- 1|-1 3 A
- .82
91.4
9 U.S
66.6
77.6
$26
M l
$28,746
International trade:
(as compared with preceding year)
Exports (monthly average)
Imports (monthly average)
l/
2/
3/
+ 3 .1+
x/+n.o(+i 6 $)
+$2 , 2 5 9
1
/+
1 / - 1 9
Percentage change
Measured to the nearest call in millions of dollars
In millions
In this case, also, money rates fell rapidly, bond prices rose, stock
prices advanced and member bank credit -underwent great expansion.
The expan
sion of exports was partly attributable to foreign loans but also reflected a
large American crop at a time when European crops were small, while the de
crease in imports reflected business recession in this country.
-
5
-
May. 1927 - December. 1927
In June, 1927 the Federal reserve system again embarked on a policy
ox purchasing United States securities and "by December had increased their
holdings by $315>000,000,
In this case, however, gold exports were large
with the result that all counter factors together offset these purchases
to the extent of $22^,000,000.
Net accessions to the market from security
purchases, therefore, amounted to $91,000,000.
In addition the market in
creased its borrowing by means of member bank discounts to the extent of
$4c,000,000 from $^73,000,000 to $529,000,000, and funds from these two
sources permitted member banks to expand their reserve balances by $1 3 7 ,000
000.
The accompanying credit developments are shown on Table III.
TABLE III
May, 1927 - December, 1927
Money rates:
Call loans, renewal
Time loans
Commercial paper
Customers (weighted average)
May,
1927
December
| Change
1927
U .2 6 #
^ 3/8
w
1 /1+
1+.3
W + 1 /1+
k
5 .0 2
1+.91
Bond prices (60 bonds S.S. Co.)
Stock prices (1+10 stocks S.S. Co.)
99.1
llU.2
1 0 0 .0
1 3 3 .1
Total loans and investments of all member
banks 2 /
$3 2 ,7 5 6
$3U,2li7
International trade:
(As compared with preceding year)
Exports (monthly average)
Imports (monthly average)
+ .13
-:3 / 8 to l/g
- 0 to l/k
- .1 1
+ *9
is. 9 (+1 7 #
1 /+
+ $1 ,1+91
1 /- 5
2 /- 3
l/ Percentage change
2/ Measured to the nearest call in millions of dollars
ll In millions
- 6 -
In this case money rates and bond prices showed relatively
little change.
Credit again expanded rapidly, however, and stock
prices again advanced by about 17 per cent.
Changes in imports
and exports, as compared with the preceding year were both neg
ligible.
Period from January, 1 Q22 to June. 1928 as a whole
Certain relevant comparisons for the period as a whole are
shown in Table IV. As the effect of an easing money policy on
such things as stock prices, bond prices, credit expansion and
foreign trade do not end automatically when the reserve banks cease
purchasing securities, this table summarizes also developments dur
ing the six months following each of the above periods, namely, from
June to December 1922, from November 19 2 U to May 1 9 2 5 , and from De
cember 1 9 2 7 to June 1 9 2 8 . The period covered therefore is the 78
months between January 1922 and June 1928.
Of these 78 months, 26
were included in the three periods of large scale purchases of se
curities by the reserve banks, and 18 were included in the 6 months
following each of these periods.
- 7TABLE IV
*
January
January
1922
1928
Member bank reserve bal. l/ $ 1 , 7 0 7
Member bank credit: l/
Total loans and invest.
23,482
35,061
S9.3
Stock prices: (S. S. Co.)
Monthly average increase
5 2 .7
9S.5
1 U5 . 3
Foreign trade: l/
Average monthly
Exports
Imports
l/ Millions of dollars
During
other
3^
mo.
648
+ 539
-
+1 1 ,5 7 9
+4,450
+2 ,8 8 3
+4,246
+
+ 171
+
+ 125
+ 9 .2
+
+
+ 8 6 .6
+ l.l
+ 1.5
+ 1.3
$379
32 6
$371
298
$ 38 2
$ 2.355 +
Average monthly increase
Bond prices (S. S. Co.)
Total
Net Changes
During 3
During 3
periods
following
covering periods of
open-market 6 months
each
operations
(18 mo.)
(2 6 mo.)
i4s
7A
56
160
.7
313
+ 165
+ 1 .1
+
.7
$383
35U
•
The summaries on this table are rather interesting.
Of the total net increase
of $648,000,000 in member bank reserve balances during the
months, $5 3 9 »000»000
occurred while the reserve banks were purchasing United States securities, and of
the total increase of 9*2 points in bond prices,
time.
points occurred at the same
The average monthly increase in total loans and investments of all member
banks was $148,000,000.
During the three periods in which the reserve banks were
purchasing United States securities heavily, however, it was $171,000,000, during
the three periods of 6 months each following these purchases it was $1 6 0 ,0 0 0 ,0 0 0 ,
while during the remainder of the 78 months it was $125,000,000.
Similarly, the
average monthly increase in stock prices for the period as a whole was 1 . 1 points,
but during periods of security purchases it was 1 . 5 points, during periods following
such purchases 1 . 3 points, while during the remaining months it
was only , 7 points.
Exports appear to have averaged about the same volume in all
three periods, while imports were lighter when securities were be
ing purchases and heavier when they were not. This does not mean
that security purchased en the part of tfee reserve banks led to
decreased imports but merely that these purchases took place dur
ing periods of sluggish business activity when American industry
had less need for foreign raw materials.
«
O ffice Correspondence
T o ___
The Federal Reserve Board
FEDERAL RESERVE
BOARD
QP
A*
U<
Date September 1 s, 1929,
Subject; Legislation re Chain Banking*
F ro m ________ Mr. Wyatt- General Counsel.
•ro
There is respectfully submitted herewith
for the Board*s information a preliminary draft of a digest
of State laws prohibiting or limiting the ownership of bank
stock by holding companies or imposing upon the stockhold
ers of such holding companies a stockholders’ liability
similar to that imposed by law upon the stockholders of
banks whose stock is held by such holding companies.
This digest was prepared in this office upon
the basis of information obtained from the Counsel of
the various Federal reserve banks and I am sending a copy
of it to each of them with a request that they give me
the benefit of their suggestions, criticisms and sugges
tions. The attached copy, therefore, is only a prelim
inary copy and is subject to revision and correction.
Papers attached.
YiW OMC
VOLUME 195
PAGE 151
w
(PRELIMINARY LEAPT - SUBJECT TO
CORRECTION AND REVISION)
DIGEST OP STATE LAWS
PROHIBITING OR LIMITING THE OWNERSHIP OP STOCK
IN BANKING INSTITUTIONS BY HOLDING CORPORA
TIONS OR IMPOSING UPON THE STOCKHOLDERS OP
SUCH HOLDING CORPORATIONS A STOCKHOLDERS*
LIABILITY SIMILAR TO THAT IMPOSED BY
LAW UPON THE STOCKHOLDERS OF BANKING
INSTITUTIONS.
X -6 3 7 5
ALABAMA.
There axe no laws in this State covering either of the
points raised.
ARIZONA.
There are no laws in this State hearing directly upon
either of the points raised.
(Note:- Section 20, Chapter 31 of the 1922 Session
Laws of Arizona provides that a "hank, loan or trust
company or association" may purchase and hold stock of
"any other hank, loan or trust company or association or
other corporation" if such purchase is authorized hy the
executive committee or approved hy the hoard of directors
and if hank stock is purchased the approval of the super
intendent of hanks must also he obtained.)
ARKANSAS.
There are no statutes in this State covering either of the
points raised.
CALIFORNIA.
There are no laws in this State covering either of the
points raised.
COLORADO.
There are no laws in this State covering either of the
points raised.
CONNECTICUT.
T h ere a r e no la w s i n
p o in ts r a is e d .
th is
-1 -
S ta te
c o v e r i n g e i t h e r o f th e
X -6 3 7 5
DELAWARE.
.
(There are no laws in this State covering either of the
points raised*
DISTRICT OF COLUMBIA.
There are no laws in the District of Columbia covering
either of the points raised.
FLORIDA..
There are no laws in this State covering either of the
points raised.
GEORGIA.
There are no laws in this State covering either of the
points raised#
IDAHO.
There are no laws in this State covering either of the
points raised.
ILLINOIS.
There are no laws in this State specifically covering
either of the points raised*
However, the Illinois General Corporation Law provides
that corporations organized thereunder may "own, purchase or
otherwise acquire * * * stocks * * * of any corporation, do
mestic and foreign", hut it is doubtful whether this provision
applies to hank stock* (See case of Central Life Securities
Company v. Smith, 236 Fed. 170. See also Section 6 of the Il
linois Banking Act which, hy referring to stockholders of hanks
by the use of the pronouns "he" or "she" in imposing a liability
upon them, creates the implication that it was intended that the
stockholders in hanks should he natural and not artificial per
sons.
-2 -
X -6 3 7 5
tot AHA,
There are no laws in this State covering either of the
points raised.
IOWA.
There are no laws in this State "bearing directly upon
either of the points raised.
(Note:- Section 7940 of the 1927 Iowa Code, which
authorizes corporations to hold stock in Railway Cor
porations, and Section 8434 of the 1927 Iowa Code,
which recognizes the right of holding corporations to
own stock in a public utility, are the only sections
of the Iowa Laws relating to the ownership "by corpora
tions of stock in other corporations. Section 9 of
Article VIII of the Iowa Constitution fixes the lia
bility of stockholders of "banks and rofors to such
stockholders "by using the pronouns Hhe or she11, imply
ing that stockholders in "banks must be natural and
not artificial persons. In view of these provisions
it is doubtful whether holding corporations in this
State may hold or purchase stock in banking corpora
tions.)
KAHSAS.
There are no laws in this State covering either of the
points raised.
KENTUCKY.
There is no law in this State limiting the power of corpora
tions to hold bank stock unless it be Section 567 of Carroll's
Kentucky statutes, which reads as follows:
nHor shall any corporation directly or indirectly, en
gage in or carry on in any way ths business of banking,
or insurance of any kind, unless it has become organized
under the laws relating to banking and insurance ****•.
-
3- *
X-6375
(Kentucky continued.)
A double liability is imposed upon stockholders of banks
for all contracts and liabilities of such banks by Section 595
of Carroll's Kentucky Statutes.
LOUISIANA
There are no laws in this State bearing directly upon either
of the points raised but it is doubtful whether holding companies
may purchase or own stock in banking institutions.
(Kote:- Although subdivision 11(e) of Section 12,
(P. 417), Act Ho. 250 of the 1928 Acts of the Louisiana
Regular Session, permits corporations "to acquire * * *
and to hold, * * * shares * * * of any other corporation,
domestic or foreign, * * *" it is doubtful whether this
subdivision is an authorization to holding corporations
to acquire or hold shares of banking institutions in view
of certain other subdivisions of Section 12, namely, I and
II, and Sections 1 (P. 409) and 2 (P. 411) of the afore
said 1928 Acts and Sections 1 (P. 1196) and 5 (P. 1203) of
Volume 2 of the 1920 Constitution and Statutes of Louisiana.)
MAI HE
There are no laws in this State bearing upon either of the
points raised.
MARYLAND,
There are no statutes in this State covering either of the
points raised.
MASSACHUSETTS
There are no laws in this State covering either of the
points raised.
MICHIGAN,
There are no laws in this State covering specifically either
of the points raised.
X-6375
(Michigan continued,)
(Uote:- The Session Laws of 1925 of Michigan, No.
363, p, 692, authorize corporations organized for pe
cuniary profit to purchase and hold shares of stock in
other corporations organized for purposes similar to
those of such corporations and this might he held to
affect the right of holding corporations to own stock
in hanks, depending upon whether or not hanks are or
ganized for "similar purposes,")
MINNESOTA.
There are no laws in this State specifically covering
either of the points raised.
(note:- Under Section 3, Article 10 of the Minnesota
Constitution each stockholders in any corporation organ
ized under the laws of Minnesota, except those organized
for the purpose of carrying on a manufacturing or mechani
cal business, is liable to the amount of the stock held or
owned by him.)
MISSISSIPPI.
There are no laws in this State covering either of the points
raised.
MISSOURI.
/
There are no laws in this State specifically covering
of the points raised*
either
(Notes- Trust companies may purchase or hold stock in
other banks or trust companies. Paragraph 9, Section 11807
of the 1919 Revised Statutes of Missouri.)
MONTANA.
There
raised.
are
no
laws
in
this
State
-5 -
covering
either
of
the
points
X-6375
NEBRASKA..
There are no laws in this State covering either of the
points raised.
NEVADA..
There are no laws in this State covering either of the
points raised.
NEW HAMPSHIRE.
There are no laws in this State covering either of the
points raised.
NEW JERSEY.
While there docs not appear to he any statute in this State
prohibiting absolutely the ownership of bank stock by holding
corporations, there is a statute known as Chapter 273, 1928 Laws
of New Jorsey, Section 3 of which prohibits corporations that own
more than ten per cent of the stock of any bank or trust company
in the State of New Jersey from purchasing after the date the
statute became effective more than ten per cent of the stock of
any other bank or trust company doing business in the State of
New Jersey, This statute does not require corporations to dis
pose of any bank stock that they may have owned boforo the law
became effective and certain institutions (enumerated in Section
14 of the laws above referred to) are specifically exempted by
Section 3 from its provisions. Section 3 reads as follows:
"3. Any corporation, other than corporations
specifically exempted from the provisions of this
act, which now or hereafter owns more than ten per
centum of the number of shares of the capital stock
now or hereafter at any time issued and outstanding
of any bank or trust company or national bank, now
or hereafter doing business in this State* shall not
purchase more than ten per centum of the number of
■
shares of capital stock at any time issued and out
standing of any other bank or trust company or national
bank, now or hereafter doing business in this State."
~S~
X-6375
( New J e r s e y c o n t i n u e d . )
Section 14, which enumerates the specifically exempted
institutions referred to in Section 3, reads as follows:
"14. The provisions of this Act and the penalties
thereof shall not apply to the following corporations,
viz.: Banks and trust companies organized under the
laws of this State and national hanks doing "business in
this State, nor to such hanks, trust companies and
national hanks while acting in a fiduciary capacity
representing any individual or individuals or the es
tate of any individual; nor to any other corporation
the entire capital stock of which is owned hy or held
in trust for the shareholders of any hank or trust
company organized under the laws of this State or any
national hank doing business in this State,, in the same
relative proportion as the stock held in said hank,.
.
trust company or national hank."
(N o t e On March 11, 1929, a hill was introduced in
the New Jersey Legislature to repeal Sections
4,. 5 and 6 of the laws above referred to. These
sections require hanks and trust companies whose
stock is owned by corporations to obtain state
ments from such corporations as to thoir hank
stock holdings as a condition precedent to the
voting or transfer of and the payment of divi
dends on, thoir holdings of hank stock.. It is
interesting to note that the repeal of thoso
soctions was sought hy tho banks and trust
companies themselves because it was felt that
tho requirements contained thcroin were cumber
some, interfered with the free sale of their
stock and imposed an unnecessary burden upon
them, hut the hill failed of enactment.)
There does not appear to he any legislation in this State
imposing upon the stockholders of holding corporations a stock
holders* liability similar to that imposed upon holders of hank
stock.
M
MEXICO.
There are- no laws in this
of the points raised hut there
New Mexico which might he held
chase or hold stock In banking
State specifically covering either
are certain sections of the laws of
to authorize corporations to pur
institutions.
-7 -
X-6375
( Hey/ Mexico c o n t i n u e d .)
(Note:-
Section 1019 of the 1915 Annotated Statutes of
New Mexico authorize corporations unrestrict
edly to "purchase, hold, * * * the capital
stock of, * * * any other corporation or cor
porations, of this or any other territory or
state, * * *" and no limitation is placed
upon the amount of such stock that may "be so
purchased or held.
Section 395 of the Statutes above referred to
prohibits banks from purchasing or holding the
capital stock of "any other incorporated com
pany" unless the acquisition of such stock is
necessary to prevent loss upon a debt previous
ly contracted and stock so acquired must be
disposed of within six months if possible*
In viow of the fact that the only specific pro
hibition in the New Mexico laws against the
purchasing or holding of stock in other corpora
tions is that as contained in Section 395, which
restricts Banks only, and that corporations un
restrictedly arc given the broad power, under
Section 1019, to purchaso and hold stock of "any
other corporation or corporations", it might bo
held that banks are included within the phrase
"any other corporation or corporations" and that,
therefore, corporations may purchase stock in
banking institutions.)
NSW YORK.
There are no laws in this State covering either of the points
raised.
NORTH CAROLINA*
There are no laws in this State covering either of the points
raised.
NORTH DAKOTA.
There
raised.
are
no
laws
in
this
State
covering
either
of
the p o i n t s
X-6375
OHIO.
There are no laws in this State specifically covering either
of the points raised. Stockholders in "banking corporations are
subjected to double liability for debts of the bank (General Code
of Ohio, Section 710-75).
OKLAHOMA..
There are no laws in this State bearing directly upon either
of the points raised but it is possible that it might be held that
corporations may purchase and hold stock in banking institutions*
(Hote;- Section 5301 of the 1921 Compiled Statutes of
Oklahoma provides that "All corporations organized for any
of the purposes authorized by this section shall have the
power to own and hold stock of other corporations, except
as prohibited by the Constitution of this State".
Section 41, Article 9 of the Constitution
of Oklahoma, forbids corporations to own or hold stock
in other competitive corporations engaged in the samp.
kind of business and banks or trust companies to own or
hold stock in other barks or trust companies, except in
those cases where such corporations or banks or trust
companies have acquired such stock to secure or satisfy
a bona fide indebtedness, and in such cases the stock must
be disposed of within twelve months.
Section 11029 of the 1921 Compiled Statutes
makes it unlawful for corporations to combine to place
the control of these corporations in the hands of a trustee
or a holding corporation if the intent and purpose of such
combination is to restrict or restrain trade.
In view of the fact that the provisions of
Section 5301 of the 1921 Compiled Statutes granting to
corporations the power to hold or own stock in other cor
porations seem rather broad, and that neither the prohi
bitions of the Constitution referred to therein and upon
which such power is dependent, nor the provisions of Sec
tion 11029 of the 1921 Compiled Statutes appear to bo
specifically applicable, in that Article 9 of the Consti
tution prohibits only banks or trust companies from owning
or holding stock in other balks or trust companios and does
not purport to prohibit corporations from owning or holding
X-6375
(Oklahoma continue d.)
stock in other corporations if the latter are not en
gaged in the same kind of "business as, and do not
compete with, the purchasing corporations, and Section
11029 of the Compiled Statutes only affects combina
tions in restraint of trade, it is possible that it
might be held that corporations may purchase and hold
stock in banking institutions.
OREGON,
In this State corporations may purchase and hold stock of
banks, corporations or associations but when they do so they
are required to comply with certain conditions and restrictions,
(Page 671, Chapter 444 of the 1929 General Laws of Oregon), How
ever, no limitation as to the amount of stock which may be owned
or held by such holding corporations is imposed nor is any stock
holders liability imposed upon the individual stockholders of such
holding corporations.
PENNSYLVANIA
There are no statutes in this State that expressly forbid
corporations to purchase or hold stock in banking institutions
but in view of the fact that this right is not included in the
exhaustive list of purposes for which corporations may be formed
(Section 5598 of the Pennsylvania Statutes), none of which are
general in terms, it is doubtful whether a corporation may be
formed for the purpose of holding stock in banking institutions.
Section 1184 of the Pennsylvania Statutes inposes a double
liability upon stockholders of banking institutions.
RHONE ISLAND.
There are no laws in this State covering either of the points
raised.
SOUTH CAROLINA
There
raised.
are
no
laws
in
this
State
-lQ-
covering
either
of
the
points
X-6375
SOUTH DAKOTA.
There are no laws in this State covering either of the points
raised.
TENNESSEE.
There are no laws in this State covering either of the points
raised.
TEXAS.
There are no statutes in this State hearing directly upon
either of the points raised "but it is questionable whether holding
companies may purchase and hold stock in hanking institutions,
(Note;— Article 513 of the 1925 Revised Statutes
forbids banks or trust companies "to own more than
ten per cent of the capital stock of any other hank
ing corporation, * * * 11 unless the ownership of
such excess stock 11shall he necessary to prevent
loss upon a debt previously contracted in good
faith; * * * ", and in such cases the stock must
not he owned for a longer period than six months.
Article 1302 of the 1925 Revised Statutes
permits private corporations to "purchase, * * *
hold, own, * * * shares of capital stock, * * * of
foreign or domestic corporations not competing with
each other in the same line of business; provided
the powers and authority * * * conferred shall in
no way affect any provision of the anti-trust laws
of this State,"
Article 7426 of the 1925 Revised Statutes
defines a trust to he "a combination of capital,
* * * by two or more persons, firms, corporation^,
* * *: (1) To create, or which may tend to create,
or carry out restrictions in trade or commerce * * *
or to create or carry out restrictions in the free
pursuit of any business authorized or permitted by
laws of this State" or "(3) to prevent or lessen
competition in aids to commerce, * * *,"
—
11—
X-6375
(Texas continued.)
Article 7427 of the 1925 Revised Statutes
states that a monopoly exists when two or more
corporations comhine or consolidate to bring
the "direction of the affairs" of such corpora
tions "under the same management or control for
the purpose of producing, or where such common
management or control tends to create a trust",
or where "any corporation acquires the shares
* * * of stock * * * of any other corporation
or corporations, for the purpose of preventing
or lessening, or where the effect of such ac
quisition tends to affect or lessen competi
tion, whether such "acquisition is accomplished
directly or through the instrumentality of trus
tees or otherwise."
In view of the foregoing it is questionable whether holding
corporations may purchase or hold stock in banicing institutions.
UTAH.
-
There are no laws in this State covering either of the points
raised.
VERMONT
There are no laws in this State expressly prohibiting the
ownership by holding companies of the stock of banks but there is
a provision prohibiting holding companies from holding or acquiring
stock in other corporations. Section 4925 of the 1917 General Laws
of Vermont contains this prohibition and reads as follows:
"The corporation shall not be permitted to acquire or
hold stock in other corporations to such an extent that
its primary business is the holding of such stock. A
violation of this provision shall be cause for the dis
solution of the corporation under the provisions of
Section 4944."
(Note:- The above provision applies to the
stock of "corporations" generally but it
would seem that it is broad enough in its
terms to prohibit also the ownership of
stock by holding companies).
-1 2 -
X-6375
(Vermont continued.)
There are no laws in this State imposing upon stockholders
of holding companies a stockholder^ liability similar to that
imposed upon holders of bank stock.
VIRGINIA.
There are no laws in this State covering either of the
points raised.
WASHINGTON.
There are no laws in this State covering either of the
points raised.
(Note:- During the 1929 Regular Session of the
Legislature of this State a bill known as "Sub
stitute House Bill No. 72" was introduced to
restrict the ownership of bank or trust company
stock by corporations, to 20$ of the capital
stock of such bank or trust company, but this
bill did not pass.)
WEST VIRGINIA.
There are no laws in this State expressly limiting the power
of corporations to hold stock in banks and such practice might be
permissible under Section 2, Chapter 54 of the West Virginia Stat
utes, which, after enumerating certain purposes for which corpora
tions may be formed, reads as follows:
'For any other purpose or business useful to the public
for which a firm or co-partnership may be lawfully formed
m this State".
Section 78 A, Chapter 54 of the West Virginia Statutes imposes
a double liability upon stockholders of banking institutions.
WISCONSIN.
A statute was recently enacted in Wisconsin providing that no
corporation may acquire more than 10$ of the capital stock of any
-13-
(Wisconsin continued.)
State "bank or trust company unless 75$ of the capital stock of
"both corporations shall vote in favor of it. No foreign cor
porations under the new law, nay purchase stock in a State
bank or trust conpany unless it shall have obtained authority
to do business in Wisconsin. (This information was obtained
from the American Barker for Sept. 10, 1929, p. 1. The text
of the Statute is not available.)
WYOMING-.
There are no laws in this State covering either of the
points raised.
@FedFRASER