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BOARD □ F GOVERNORS □ F THE FEDERAL RESERVE SYSTEM Office Correspondence To_______Thejiles_______________ t Date August 5, 1941 Subject:. From_____Mr- Coe I After correspondence with Mrs. Hamlin (see letters of May 25 and June I+9 1941) the items attached hereto and listed below, be cause of their possible confidential character, were taken from Vol ume 221 of Mr. Hamlin’s scrap book and placed in the Board’s files: VOLUME 221 Pa-ges 20 - Memo to Board from Mr. Morrill re ’’possible desirability of amending F.R. Act so as to permit a F.R. Bank in emergencies to make advances to member banks on the security of assets other than presenting eligible paper”. Pgia.e.s.2, 6 - Letter from Sec’y Mellon to Chairman of Committee on Banking and Currency, U.S. Senate. Page 27 - Memo to Mr. Hamlin from Mr. Goldenweiser attaching table which shows aggregate principal and interest payments under the funding agreements with foreign governments. £age 46 - Amendment to F.R. Act permitting wider advances to F.R. Banks. il3ge 4.Z ~ (X~37S4) Rediscounts for Nonmember Banks. Pages 49 & ?1 - Letters to Mr. Hamlin from Atlantic National Bank of Boston "dealing with the proposed amendment to the existing trust under which the stock of The Atlantic Corporation is now held”. Page 59 - Memo to Mr. Hamlin from Mr. Goldenweiser attaching memo on bank activities outside the field of deposit and discount. Page 65 - Memo to Mr. Hamlin from Mr. Goldenweiser attaching memo pre pared by Mr. Blattner on activities of banks outside the field of deposit and discount. Page ?2 Preliminary Memorandum for the Open Market Policy Conference November 30, 1931. 9 ^ Haralin Mr. Wyatt enclosing copy of a memo in which the Board’s Regulation A could be modified so as to broaden the classes of paper eligible for rediscount without awaiting Con gressional action. Page 83 - Memo to Mr. Wyatt from Mr. Seitz re Positions Board has taken re Vaxue of Government Securities. Page 8f> - Memo to Mr. Hamlin from Mr. Wyatt re rediscount of paper se cured by bonds of War Finance Corporation. Page 87 - Broadening of Eligibility (Abstract of Replies to Questionnaire sent out by Senate Committee in December 1930). Page 101 - Secretary’s Minutes - Governors' Conference. To From Each Board Member Subject:. ________ _ _____ Mr. Morrill " or o 2— 8495 During the April, 1931, Governors* Conference consideration was given to the "possible desirability of amending Federal Reserve Act so as to per mit a Federal Reserve bank in emergencies to make advances to member banks on the security of assets other than presently eligible paper." The discussion at the Conference developed the opinion that some broadening of eligibility requirements as an emergency measure under proper restitutions and regulations might be desirable, and it was voted (Governors Calkins, Martin and Talley voting in the negative): "That it is the sense of the conference that it would be desirable to amend Section 13 of the Federal Reserve Act so as to make it possible for Federal Reserve banks to make advances to their member banks on their promissory notes when secured either by collateral now defined as eligible collateral under the terms of Section 13, or when secured by the deposit or pledge of debentures of Federal Intermediate Credit Banks which have a maturity of not more than six months, or in the case of an emergency when secured by other assets subject to the discretion of the Board of Directors of the Federal Reserve bank and subject to such restrictions, limitations, and regula tions as may be imposed by the Federal Reserve Board. It was the understanding of the conference that when such notes of member banks are secured by notes, drafts, bills of exchange, or bankers* acceptances, such as are now eligible for redis count or purchase by Federal Reserve banks, such promissory notes should have a maturity of not more than 90 days sight, exclusive of days of grace, and that when secured in whole or in part by any other collateral they should have a maturity of not more than 15 days sight, exclusive of days of grace. It is the sense of the conference that if the Federal Reserve Board approves the principles involved in this resolution, it should be asked to consider what would be an appropriate time to request the necessary legislation." This matter was also considered at the meeting of the Federal Advisory Council on September 15, 1931, and the Council made the following recommendation to the Board: "The Federal Advisory Council suggests that the Federal Reserve Board consider the advisability of permitting Federal Reserve banks in times of pressure to accept from member banks bills payable on securities not now eligible, the Federal Re serve Board to issue regulations defining the conditions under which such action may be taken." VOLUME 221 PAGE 20 ‘ COPY. December 22, 1331* My dear Mr. Chairman: I he.7 e ’v W le t t e r f December 12th enclosing a copy of S. 1 , a h i l l to provide emergency fin a n fe irg fa cilities for banks and other inancinl in s titu tio n s , and other pur oses, and requesting the opinion o f t’is Department as to the proposed b i l l . I am s a tis fie d that the reed e x ists for the creation of the corporation contemplated in the b i l l . The mere existence o f such an instrum entality, furnished with adequate resources &n<. enabled to deal with any weakness that may develop in our credit struct re , should ha~e a reassuring effect on public onfiderce and a . tim ulating influence on the resumption o f the normal flow of credit into the channels of business and commerce. I understand that the Governor o f the Federal Reserve Board has suggested m arae^d lent to section 5 vdth a view bo de» f i l i n g somewhat more accurately the term Tother fin a n cia l in s titu tio n • 1 approve of th is amendment. I under tan'1 further that hum Lieyer has suggested that the loans o steam railroads provided for in section 5 should be mrde only subject bo the approval and recom mendation of the Interstate Commerce Commission. This seems to me a most desirable amendment. The Treasury Department approves c f the b i l l ana tru sts that i t may receive early and favorable consideration by the Banking and Currency Committee of he Senate. Very sincerely yours, (Signed) A. "W. Mellon, Secretary of the Treasury. Bon. le t or ,Torbeck, Chairman Cortmittee on Banking said Currency, United States Senate. VOLUME 221 PAGE 26 O f f i c e C o r r e s p o n d e n c e To Mr. Hamlin From Mr. Groldenwei?— FEDERAL RESERVE BOARD Date December « 1931 Subject:. •I . I am sending you a table which I obtained from the Treasury, which shows aggregate princip al and in terest payments under the funding agreements with foreign gov ernments. You w ill note that in the aggregate the prin cip a l is somewhat larger than the in te r e st. During e a r lie r years, however, the principal is much the smaller part of the payments and i t wouldn't reach $1 0 0 , 0 0 0 ,0 0 0 before 1 9 3 ° I believe the tab le is considered co n fid e n tia l. VOLUME 221 PAGE 27 2— 8405 RECEIPTS FOR THE FISCAL YEARS 1923 TO 1930, INCLUSIVE, AND ESTIMATES OF RECEIPTS FOR FISCAL YEARS 1931 TO 1990, INCLUSIVE FROM FOREIGN GOVERNMENTS UNDER DEBT FUNDING AGREEMENTS. Fiscal Year 1923 . . 1924 . . 1925 . . 1926 . . 1927 . . 1928 . . 1929 . . 1930 . . 1931 . . 1932 . . 1933 . . 1934 . . 1935 . . 1936 . . 1937 . . 1938 . . 1939 . . 1940 . . 1941 . . 1942 . . 1943 . . 1944 . . 1945 . . 1946 . . 1947 . . 1948 . . 1949 . . 1950 . . 1951 . . 1952 . . 1953 . . 1954 . . 1955 . . 1956 . . 1957 . . 1958 . . 1959 . . 1960 . . 1961 . . 1962 . . 1963 . . 1964 . , 1955 . . 1966 . . $ $ 23,045,000.00 23,084,672.50 54.955.300.25 65.060.130.06 67,788,424.67 59.154.795.26 97,634,287.76 51,588,133.37 62.344.618.07 74,881,881.00 92,999,579.35 99,076,903.41 110,486,991.67 122,101,685.80 133,522,227.88 140,177,475.38 144,959,236.73 122,346,750.58 129.234.423.02 131.247.682.03 131,865,673.48 138,084,642.28 140,187,807.98 142,151,938.30 149,341,598.63 151,472,414.16 153,030,605.10 143,694,109.33 148,203,425.27 152.773.591.71 158.355.528.71 165,280,247.76 168,249,022.40 171.154.773.79 177,213,036.21 171,527,175.82 176.559.959.79 181,651,170.62 188,909,806.13 192.128.514.05 200,506,773.42 205,849,230.91 204.396.394.05 Total Interest Principal 69,135,000.00 137,938,976.57 137,905,551.04 139,797,319.21 139.826.159.14 139,943,553.39 139.973.850.97 141,931,519.25 184,474,614.51 184.222.188.37 195.094.700.43 205.724.561.44 204.678.348.38 205.962.430.97 204,160,798.20 202.234.382.97 200 ,082,500.23 199.685.550.45 234,013,060.65 231.285.780.64 228.428.470.08 230.126.124.73 227.091.078.18 223.950.505.29 220.773.880.15 217,472,931.43 214,046,601.86 210.593.906.94 225,310,182.92 221,647,254.59 217,864,366.70 213.943.108.41 210.090.328.64 205.866.859.29 201.585.086.42 197.653.649.43 204.679.579.74 199.984.905.95 199,345,572.11 194.243.034.18 188.992.770.08 183,578,909.01 177,961,156.80 181,620,796.69 $ 69,135,000.00 160,983,976.57 160,990,223.54 194.752.619.46 205.886.289.20 207.731.978.06 199.128.646.23 239,565,807.01 236,062,747.88 246.566.806.44 269.976.581.43 298.724.140.79 303.755.251.79 316.449.422.64 326,262,484.00 335.756.610.85 340,259,975.61 344,644,787.18 356.359.811.23 360,520,203.66 359.676.152.11 361.991.798.21 365.175.720.46 364,138,313.27 362.925.818.45 366.814.530.06 . 365,519,016.02 363,624,512.04 369,004,292.25 369.850.679.86 370,637,958.41 372.298.637.12 375,370,576.40 374,115,881.69 372.739.860.21 374.866.685.64 376,206,755.56 376,544,865.74 380.996.742.73 383,152,840.31 381.121.284.13 384.085.682.43 383,810,387.71 386.017.190.74 - Fiscal Year 1967 . . . 1968 . . . 1969 . . . 1970 . . . 1971 . . . 1972 . . . 1973 . . . 1974 . . . 1975 . . . 1975 . . . 1977 . . . 1978 . . . 1979 . . . 1980 . , . 1981 . . . 1982 . . . 1983 ... ^ 1934 . . . 1985 . . . 1986 . . . 1987 . . . 1988 . . , 1989 . . , 1990 . . . 2 Principal 213,380,398.32 220.048.383.64 228,053,832.52 236,887,536.66 246.216.158.02 254.730.380.02 264,336,103.88 273,145,411.96 282,152,303.40 292,766,012.73 302.395.933.65 314,130,488.00 324,933,129.81 335,259,227.48 346,663,118.16 360,391,547.27 372,253,078.13 388,357,946.79 395,709,462.05 216,711,585. 62 215,587,786.64 350.000. 350.000. 350.000. 00 00 00 - Interest Total 175,561,553.93 169,281,551.11 162,788,186.22 156,026,052.30 151,580,736.91 144,154,117.36 136,449,482.43 128,461,843.03 120,203,360.42 111,649,566.18 102,791,755.27 93,629,360.55 84,131,221.52 74,299,669.93 69,157,398.86 57.980.973.83 46.386.500.84 34,350,784.78 21,936,310.72 12,577,329.66 6,262,522.53 388,941,952.25 389,329,934.75 390,842,018.74 392.913.588.96 397 ,796,894.93 398,884,497.38 400,785,586.31 401,607,254.99 402,355,663.82 404.415.578.91 405.187.688.92 407,759,848.55 409,114,351.33 409,558,897.41 415,820,517.02 418,372,521.10 418.639.578.97 422,708,731.57 417,645,772.77 229,288,915.28 221,850,309.17 350.000. 350.000. 350.000. 00 00 00 $11,704,487,463.44 $10,554,582,184.81 $22,259,069,648.25 ) P ebruary 16, 1931. / v ' . J F o r m iPTo. 131 Office Correspor ence T o __Mr. Hamlin FEDERAL RESERVE BOARD D ate D eoqp fc e r 5 , 1931# Subject: From _ Mr. M orrill •to 2— 8495 During the A p r il, 1931, Governors* Conference consideration was given to the "p o ssib le d e s ir a b ility o f amending Federal Reserve Act so as to per* mit a Federal Reserve bank in emergencies to make advances to member banks on the secu rity o f assets other than presently e lig ib le paper-" The discussion at the Conference developed the opinion that some broadening o f e l i g i b i l i t y requirements as an emergency measure under proper r e str ic tio n s and regulations might be d esirab le, and i t was voted (Governors Calkins, Martin and T alley voting in the negative): "lh a t i t is the sense o f the conference that i t would be desirable to amend Section 13 o f the Federal Reserve Act so as to make i t possible fo r Federal Reserve banks to make advances to th eir member banks on th e ir promissory notes when secured e ith e r by c o lla te r a l now defined as e lig ib le c o lla te r a l under the terms o f Section 1 3 , or when secured by the deposit or pledge o f debentures o f Federal Intermediate Credit Banks which have a maturity o f not more than s ix months, or in the case o f an emergency when secured by other assets subject to the discretion o f the Board o f Directors o f the Federal Reserve bank and subject to such r e s tr ic tio n s , lim ita tio n s, and regula tion s as may be iiiposed by the Federal Reserve Board. I t was the understanding o f the conference that when such notes o f member banks are secured by notes, d r a fts , b i l l s o f exchange, or bankers* acceptances, such as are now e lig ib le fo r redis count or purchase by Federal Reserve banks, such promissory notes should have a maturity o f not more than 90 days s ig h t, exclusive o f days o f grace, and that when secured in whole or in part by any other c o lla te r a l they should have a maturity o f not more than 15 days s i ^ i t , exclusive o f days o f graceI t is the sense o f the conference that i f the Federal Reserve Board approves the p rin cip les involved in th is re so lu tio n , i t should be asked to consider what would be an appropriate time to request the necessary le g i s l a t i o n ." This matter was a lso considered at the meeting o f the Federal Advisory Council on September 1 5 , 1931, find the Council made the follow ing recommendation to the Board: "The Federal Advisory Council suggests that the Federal Reserve Board consider the a d v isa b ility o f permitting Federal Reserve banks in tiroes o f pressure to accept from member banks b i l l s payable on se c u r itie s not now e li g i b le , the Federal Re serve Board to issue regulations defining the conditions under which such action may be tak en ." VOLUME 221 PAGE / 6 . ^ ii FEDERAL RESERVE B O A R D • WASHINGTON A D D R E S S O F F IC IA L C O R R E S P O N D E N C E T O T H E FEDERAL RESERVE BO ARD X-37SU July 13, 1 9 2 3 . SUBJECT: Rediscounts for Nonmember Banks . Dear Sir: During the emergency of 1921, the Federal Reserve Beard granted to member Banks the privilege of acting as the media or agents of nonmember banks in rediscounting paper with Federal Reserve Banks. (Circular letter X-3 1 7 6 , July 27, 1921: Federal Reserve Bulletin, August, 1921, page 963 )» That privilege, however, was granted only as a temporary emergency measure arid, the emergency having passed, it was revoked by the Federal Reserve Board under date of June 26, 1923• In advising you of the withdrawal of such privilege the Board announced that all previous rulings on this subject ware rescinded, and that announcement has led to a number of inquiries as to the proper appli cation of the Board’s ruling. The Board has deemed it advisable, there fore, to announce the following rules for the guidance of the Federal Reserve Banks and the member banks; 1* The ruling published on page 963 of the August, 1921, Bulletin, which gave member banks general authority to apply to their respective Federal Reserve Banks for discounts of eligible paper ac . quired from nonmember banks, and the ruling published on page 213 the August, 1915* Bulletin are rescinded in toto. The rulings pub lished on page 520 of the June, 1913, Bulletin and or page 7^5 the August, 1913, Bulletin are rescinded in so far as they apply to the rediscount of paper bearing the signature or endorsement of nonmember banks or acquired from nonmember banks. 2. Except with the Board’s permission, no Federal Reserve Bank shaD.J- discount any paper Acquired by a member bank from a nonmember bark or bearing the signature or endorsement of a nonmember bank: Provided, however , That Federal Reserve Banks may discount bankers’ ac ceptances and other eligible paper bearing the signature or endorsement of a nonmember bank, if such paper was bought by the offering bank in good faith on the open market from some party other than the nonmember bank. 3* Applications for permission tc, rediscount paper acquired from nonmember banks shall be made by the member bank which desires to offer such paper for rediscount and shall state fully the facts which give rise to each application and the^reasc-ns why the applying member bank feels justified in seeking such permission. VOLUME 221 PAGE 47 -2- X-37SU h. As a general rule, the Federal Reserve Board will not permit member banks to discount paper for nonmember banks which are eligible for membership, because such banks should join $he Federal Reserve System if they desire to participate in its benefits. The -ooa.rd will make exceptions to this rule, however, in some cases in order to assist such banks in emergencies for a limited time; but such exceptions will be made only with the understanding that they v/ill not be continued beyond'the period when the bank concerned can qualify for admission to membership in the Federal Reserve System. By order of the Federal Reserve Board. 7m. W. Hoxton, Secretary. TO g o v e r n o r s o f f . r . b a n k s 7 . -< * l u ORIGINAL CHARTER k K 1828 Th e A t l a n t ic N a t io n a l B a n k o f B o s t o n IO HA H E R B E R T K. C H AI R M AN OF T H E l e t t POST B o f f i c e o s t o n , M ; s q u a r e a s s . August 10, 1931, Mr. Charles S. Hamlin, c/o Federal Reserve Board, Washington, D. C. My dear Mr. Hamlin: I am enclosing herewith copy of my letter of even date to the Federal Reserve Board dealing with the proposed amendment to the existing Trust under which the stock of The Atlantic Corporation is now held. Very truly yours, HKH*CHM Enclosure VOLUME 221 PAGE U9 /ff August 10, 1951 Federal Reserve Board, •ashington, 1 . C. Dear Sirs* The proposed amendment to the Trust Indenture uaeer which the stock of The Atlantic Corporation is no. held, accomplishes a situation which it stems to me merits the careful consideration of your Board. Tho fora of the amendment has been agreed upon by tho Counsel for the Board and our Counsel upon the understanding that the original order of the Comptroller required that The Atlantic Rational Bank should divest itself not only of the stoc of The Atlantic Corporation, but also should remove from itself all po, sible future benefit from the assets of the Corporation srhich the stock now represents. Before tha proposed amendment is executed, I wish respectfully to uestion whether this result was contemplated by the order of the Comptroller, and to ask that your Board consider it with especial reference to the features I am no** pointing out before you give it your final approval. Following the receipt of the order of the Comptroller that we remove tho stocit of The Atlantic Corporation from the esseta o f The Atlantic National Bank, we charged off the amount at which the stock was carried upon the books of tho Bank, and transferred the stoci to three individuals, and no - certificates were issuer in their names as Trustees. They executed * Trust indenture (dated August 1, 1950) under which they stated that tney held the stock for the benefit of the Bank; that they held tiie legal title to all property of the trust and had absolute control and dis position thereof as if they were the absolute owners; that all income and profits from the trust should be paid to the Bank and that, in event of termination of the trust for any cause, the trust fund should be paid to the Bank; that the Bank had the right to name the Trustees, alter or ament* the Indenture and require that the trust property be reconveyed to the Bank or be solo and the proceeds paid to the Ban*. The transactions un er v h lc fa the stoc^ was charged off from the assets of the Bank and transferred to the Trustees were authorised by the Directors end Stoc kholders of the Bank, ana we believed that we had complied fully with the request of the Comptroller and that the result would bo acceptable to him and to the Federal Reserve Board. F ederal iiisnt I n '- m B oard SAo/51 The Counse 1 fo r the Board objected to ta* Indentur and tae proposed eseiv Is the raoult o f ssigotlatloae between our Counenl and th® Counsel fo r th«* Board* Tho proposed e^eefcuuent states that tho Bank bolus ^hp beneficial lattsirect i& t&o trust fido for the beztftfit of the Stocholder® of th© rfaa > that *11 lnco*.i *•••.'* distributions of principal of tb« fund upon tcraination of tho trust or ethor«iee obeli bv paid by the B«nk to its stockholders forthwith upon reeeipt| and »p<-cificfclly that in no <rgot shell ergr of th* trust .roperty or proceeds th roof bo transferred to the Ban*, except for iano^i&to diitnbutton to its oboc...hoiu^-rn• The Comptroller and Federal Rewrv* Board ^.rc nut interested In the c<*pUeatlont arising *« between the Bank and its Shareholders under thr> an chin ry of ndelnlitretion of the aaouded trust, or th* l >g*I iuestieae arising as to the nevly created rl fete end obligeiions of thu Shareholders, but, It seoas to aw* they ere Interested in th® irvcti.un in $o far os it &za octp the stability &nd future prospects oi tfat- Ban-* I'-itJEi the approval of tho Stockholder* of th® Beak e substantial eaeunt h&e been trans ferred free the surplus of Ui© Bank to t».e capit&l of the Corporation* it no tl#k* ha.v© »e understood that in so doing #e bed removed fro© tho creditor* &n& depositors of tii?.- Bank, the right to loo* to this fund for the set!ifaction of th-e obligation*? of the Stin&t end X e^ confident that et no tine have th© Shereholdere of the Bank believed that titty had *cy interest in the Corporation, excepting through their shareholdings of the Bank and as such subject to ell of tho Bank*® obligations* It is true that the Indenture of Aqgust 1, IS50 pi resits the r?-trensfor of the etoft£ of the Corporation to the Ban.--., but it ie unreasonable to seppose that tr.is r ig h t vould bo exercised a, & im t th--. order of tho Comptroller9 and if this -revision l» considered of importance, it ie a simple setter to emend that Indenture by adoing a . •revision that the stock of tho Cor, oration dial! not be transferrod to the Bank enu that ary transfer of assets fro* tho Cor poration to the Bank else11 be in a for* ».cco. tabls to the Comptroller* It ©earns to ee that the acta of Use Bank under tho Indenture of august 1, XjTO, sre in accordance eith a pr&ctical end fair Interpretation of 'the original orv.er of the Con troller. It does not seen to ?a© tuet to© order celle for a technical construction involving e .ul &bl. interests, **btie the stock of the Corporation as such, eeunot be c&rrleu legally as an eseet of the Band, it eouli aeea to be go lag far also to say that the Bank can never derive aty profit froa tho operations of the Cor,oration or receive asset* into ehlcli the stock sey bo converted or any of the cash proceeds in event of liquidation* &«y it not be that in obtaining e strict int©rprs?tfction of the order of the Comptroller, »e ar© aacr'fIcing vital interests of the Bank in *hi«h the Goverai-nt Agendas &r© epeoieiljr concerned* Th« Interest of the credttom ami de^'Oel v.jre ot th« Bank ar© predonlnent, and ve «rl#h to co-op-rate vith th® Goverment Agencies In ©very effort that thty bo preserved* Federal Reserve Board s / io / n -5 - X hr.vs you thss® co^scienti? In lh«.:. strong b-lief Jar t* -he ^\jjcu Jon of lAondiizit is c o n t r & r y to fch b e e t i n t e r e s t s o i t h e B e n * . * ■*j- I n t * - bop*.-: tbet you will decide that the T r u e t uruler the Indenture of Au* ur-t 1, i>2SJ is a satisfac tory coaplUnoa urlth the order of the Comptroller* 'the >ro josod Very truly yours, EXR«CHM ft. K. Eallett Chalra&n of the Board * u C O P Y r U t August 1 0 , 1931 Federal Reserve Board, W a sh in gto n , D* C* Dear Sires (Che proposed amendment to the Trust Indenture inder which the stock o f The A tla n tic Corporation i s now h e ld , accomplishes a situ a tio n which i t seems to me m erits the careful consideration o f your Board# The form o f the amendment has "been agreed upon "by the Counsel fo r the Board and our Counsel upon the understanding that the o r ig in a l order of the Comptroller required that The A tla n tic National Bank should divest i t s e l f not only o f the stock o f The A tlan tic Corporation, hut a lso should remove from i t s e l f a l l p o ssib le future b en efit from the a ssets o f the Corporation which the stock now represents* jt. Before the proposed amendment i s executed, I wish re sp e c tfu lly to question whether th is resu lt was contemplated by the order of the Comptroller, and to ask that your Board consider i t with especial reference to the features I am now pointing out before you give i t your f in a l approval* Following the receipt o f the order o f the Comptroller that we remove the stock o f The A tla n tic Corporation from the a ssets o f The A tla n tic National Bank, we charged o f f the amount at which the stock was carried upon the books o f the Bank, and transferred the stock to three in d iv id u als, and new c e r tific a te s were issued in th e ir names as Trustees* They executed a Trust Indenture (dated August 1 , 1930) under which they stated that they held the stock fo r the b e n e fit o f the Bank; that they held the le g a l t i t l e to a l l property o f the trust and had absolute control and d isp o sitio n thereof as i f they were the absolute owners; that a l l income and p r o fits from the trust should be paid to the Bank and th a t, in event o f termination o f the tru st fo r any cause, the trust fund should be paid to the Bank; that the Bank had the r i g i t to name the Trustees, a lt e r or amend the Indenture and require that the tru st property be reconveyed to the Bank or be sold and the proceeds paid to the Bank* 9il The transactions under which the stock was charged o f f from the assets o f the Baik and transferred to the Trustees were authorized by the D irectors and Stockholders o f the Bank, and we believed that we had complied f u ll y with the request o f the Comptroller and that the resu lt would be acceptable to him and to the Federal Reserve Board* The Counsel fo r the Board objected to the Indenture and the proposed amendment i s the re su lt o f negotiations between our Counsel and the Counsel f o r the Board* Die proposed amendment sta te s that the Bank holds the b e n e fic ia l in te r e st in the tru st fundfor the b en e fit o f the stockholders o f the Bank; VOLUME 221 PAGE 51 1 that a l l Income and d istrib u tio n s of p rin cip al of the fund upon termination o f the tru st or otherwise sh a ll he paid by the Bank to i t s stockholders forthwith upon re ce ip t; and s p e c ific a lly that in no event sh a ll any o f the txrust property or proceeds thereof he transferred to the Bank except fo r imnediate d istrib u tio n to i t s Stockholders. I I | % The Comptroller and Federal Reserve Board are not interested in the complications arisin g as between the Bank and i t s shareholders under the machinery o f administration of the amended tr u s t, or the le g a l questions a r isin g as to the newly created r i^ it s and obligation s o f the Shareholders, but, i t seems to me they are interested in the transaction in so fa r as it a ffe c ts the s t a b ilit y and future prospects o f the Bank. With the approval of the stockholders o f the Bank a substantial amount has been transferred from the surplus o f the Bank to the cap ital of the Corporation. At no time have we understood that in so doii^-we had removed from the creditors and depositors o f the Bank, the right to look to th is fund fo r the sa tisfa c tio n o f the ob ligations o f the Bank, and I am confident that at no time have the shareholders o f the Bank believed that they had any in te re st in the Corporation, excepting through th eir shareholdings of the Bank and as such subject to a l l o f the Bank1s o b lig a tio n s. I t i s true that the Indenture o f August 1 , 1930, permits the re -tra n sfe r o f the stock o f the Corporation to the Bank, but i t is unreasonable to suppose that th is right would be exercised against the order of the Comptroller, and i f th is provision i s considered of Importance, i t i s a simple matter to amend that Indenture by adding a provision that the stock / o f the Corporation sh a ll not be transferred to the Bank and that any transfer I o f r e se ts from the Corporation to the Bank sh a ll be in a form acceptable to 1 „ the C o n t r o lle r . • I t seems to me that the acts o f the Bank under the Indenture o f . August 1 , 1930, are in accordance with a p r a c tic a l and f a i r interpretation o f the o rig in a l order o f the Comptroller. I t does not seem to me that the order c a lls fo r a technical construction involving equitable in te r e s ts , idiile the stock o f the Corporation as such, cannot be carried le g a lly as an asset of the Baik, i t would seem to be going fa r also to say that the Bank can never derive any p r o fit from the operations o f the Corporation or receive any assets into ih ich the stock may be converted or any of the cash proceeds in event o f liq u id a tio n . May i t not be that in obtaining a s t r i c t interpretation o f the order of the Comptroller, we are s a c r ific in g v it a l in te re sts o f the Bank in which the Government Agencies are sp e c ia lly concerned. The in terest of; the creditors aid depositors o f the Bank are predominant, and we wish to cooperate with the Government Agencies in every e ffo r t that they be preserved. I have given you these com eats in the strong b e l i e f that the execution o f the proposed amendment is contrary to the best in te re sts of the Bank, and in the hope that you w ill decide that the Trust under the 3. Indenture o f August 1 , 1930, is a sa tisfa c to r y compliance with the order o f the Comptroller# Very truly yours, (Signed) H* K. H a lle tt Chairman of the Board# HKH*CHM i J Form No. 131 O ffice Correspoiraence FEDERAL RESERVE BOARD To__ _ Date 4-<. jf^A October 28, 1911 Subject:. *.. Go From I transmit herewith a memorandum on hanli activities outside the field of deposit and discount prepared by Miss Cohen and Mr. ■fis *' Elattner of this division's staff. I hope that this memoranda will be suitable for your purpose- •VOLUME 221 PAGE 59 F o r m $ fo . 131! O ffice Correspondence To Mr. Goldenweiser From Miss Cohen and Mr. FEDERAL RESERVE BOARD n atPOctober 27, 1931 Subject: ^ank Activities Outside the aV # r Field of Deposit and Discount aro 2—8405 You recently requested that statistics be brought together which would illustrate and form some basis of measurement of the extent to which oanks have tended since the passage of the Federal Reserve Act to increase their activities outside the field of deposit and discount. It was sugges ted that the movement might be illustrated by presenting some facts with respect to New York City banks alone. After canvassing information avail able, it would appear that statistical tests are of a very imperfect sort, despite the fact that observers are conscious of the considerable growth in the varieties of bank activities over the last decade and a half. The factual evidence rests upon the piecing together of fragments taken from various places. In using the Qanks oi New York City (Borough of Manhattan) by way of illustration, the national bank group can perhaps best be used as a sample since the Federal Reserve Act contained several provisions liberalizing the powers of national banks, and the tendency among them is auite clearly de fined. The right to exercise trust powers, for example, was granted to national banks by the Federal Reserve Act; and according to the 1930 report of the Comptroller of the Currency, the trust business of national banks has reached considerable proportions in the meantime. Of the 20 national banks in New York City, Rand McNally reports that 15 have trust departments and the Comptroller's report shows that gross earnings from this business during the fiscal year 1930 amounted to about $7,800,000, or 3 p er cen t o f th e g r o s s o f t h e e a r n in g s fr o m t h i s th e y e a r s f o r in com e o f s u ch b a n k s . fie ld is in d ic a te d in The g r o w in g im p o r ta n c e th e f o l l o w i n g t a b l e f o r w h ic h d a t a a r e a v a i l a b l e : All New York City National Bants Year ending June 30 : Gross ear nine’s : From trust : From all : business : business (In thousands) :Per cent of gross : derived from :trust business 1924 $1,821 $157,842 1.15 1925 2, a 6 170,097 1.30 1926 3,107 184,193 1.69 1927 3,978 191,651 2.08 1923 5,229 204,924 2.55 1929 7,556 218,803 3.45 1930 7,762 226,185 3.43 Some banks, not included in the 15 having t'tust departments, trans acted a fiduciary business through affiliates. A notable example of this is the City Bank Farmers Trust Company, which took over the trust business of the National City Bank and the Farmers Trust Company. No figures for the aggregate of trusteed assets controlled by New York City national banks have come to our attention, but for all national banks of the New York Federal Reserve District it appears that on June 30, 1930, 293 oanks (out of 371 having authority to do so) exercised their fidu ciary powers. Most of these were large banks as the average resources amount— - ed to $22,000,000. 3 - They were administering close to 12,000 individual trusts with trusteed assets of $1,058,000,000, and 3,000 corporate trusts representing bond issues outstanding of $8,794,000,000. According to Hand McNally, 15 national banks in New York City had savings departments as of December 31, 1930, but this does not include one bank which reported to Moody*s as doing a savings business in addition to general conrnercial banking. As of December 31, 1930, time deposits were 14 per cent of total gross deposits among New York City national banks, which represents a considerable growth in this style of activity of recent years. In 1925 the ratio of time to total gross deposits was 8 oer cent; in 1920, 4 per cent. During the same period of time, the proportion of national bank port folios represented by investments,as contrasted to loans and discounts, has been increasing. As of the end of 1915 approximately 16 per cent of the portfolios of New York City national banks was in investments; 18 per cent was in investments by 1920; 27 oer cent in 1925; and 29 per cent in 1930. During these years national banks have been increasing their interest in the security business in general, as dealers, originators, and underwriters. Some statistical measure of these activities will be presented in uaragraphs to follow which deal with some of the larger national ban'-s specifically. The managements of national banks have broadened their activities by means of organizing affiliates owned by the same stockholders as the banks, many of which have legal powers beyond those accorded national banks. Al though affiliates of banks existed before 1915, recent years have witnessed particular activity with respect to organizations of this sort. The field of activities covered by bank affiliates is very large and the scope of many of them is so broad as to render them difficult of classification. However, there are upwards of a dozen securities companies affiliated with Hew York City national banks, and affiliates include investment trusts, safe deposit companies, and realty holding companies. Some of the affiliates are non financial organizations, such as the sugar cormoanies indirectly controlled by the National City Bank, the shipping lines owned by the Grace Company, of which Grace National Bank is also a subsidiary, the numerous Harris, Forbes organizations merged into the Chase-Harris, Forbes Corporation and connected with the Chase National Bank through the Chase Securities Corpora tion. No material is available indicating the aggregate asset strength of affiliates. It may serve a useful purpose by way of illustration to bring out sepa rately some of the facts with respect to the three largest national banks in New York City, which among them have almost 30 per cent of the assets of all national banks there. The Chase National 3ank controls directly or through holding companies about 40 affiliates, the relationships originating in recent years in most instances. During 1930, the Chase Securities Corporation (established 1917) participated in the flotation of close to $600,000,000 of securities of which $267,000,000 were originations of this house. Harris, Forbe3 and Company (affiliated 1930) originated $464,000,000 of securities and parti cipated in a total of about $1,500,000,000I The affiliates of the Chase National Bank included as of June 30, 1931: Securities companies Holding companies Real estate companies Travel accommodations Banks, foreign and domestic, including trust companies 10 1 4 2 7 Miscellaneous 17 Total 41 The National City Bank has about 25 affiliates, 4 of which are domestic or foreign banks. The securities affiliate, National City Company, was established in 1911 and during 1930 it originated issues amounting to $144,000,000 and participated in a total of about .$1,250,000,000. Nine subsidiaries are companies formed to take over the commitments of the bank in Cuban sugar companies. The City Bank Farmers Trust Company, the stockholders of owned by/the bank, was established in 1929 when the trust business of the National City Bank and the Farmers' Loan and Trust Company was con solidated. in the city. The latter had one of the largest personal trust businesses The National City affiliates included: Securities company Real estate and mortgage companies Holding companies Banks, foreign and domestic, including trust companies Importing and manufacturing companies and sugar com panies Miscellaneous Total 1 2 3 / 4 i * 9 5 - 24 The First National 3ank of the City of New York, as is well known, has been for many years heavily interested in investment banking activi ties. It was a pioneer in the field of security affiliates, organizing the First Securities Company in 1908. flotations aggregating $674,000,000. In 1930 it participated in security Ikwrm N o . 1 8 1 Office Correspoiftence FEDERAL RESERVE BOARD ^ Date_November 18, I93 I Subject:. I transmit herewith a memorandum from Mr. Blattner on activities of banks outside the field of deposit and discount. This is in accor dance with your request of October twenty-eighth. You will notice « that Mr. Blattner has had considerable difficulty in finding informa tion bearing directly on the subject of your inquiry, but has put to gether such facts as may throw a light on the increasing importance played in banking operations by activities other than deposit banking. VOLUME 221 PAGE 65 n * F o r m N o . 131 Office Correspor ence To_ Mr. Goldenweiser FEDERAL RESERVE BOARD Date NoV0m^0r 16» 1931 Subject:^?^vit^e3 From _ Mr. Blattner banks outside the field of deposit and discount. We refer to our memorandum of October 27 on this subject and to Mr. Hamlin^ memorandum requesting further development of certain points. Our investigations suggest that in the year 1913 the following New York City banks were probably operating almost exclusively in the field of deposit and discount: National Bank of Commerce; Chase National Bank; National Park Bank; Seaboard National Bank; American Exchange National Bank; and Mech anics and Metals National Bank. On the other hand, the National City Bank, Pirst National Bank, Guaranty Trust Company, and Bankers Trust Company, were in 1913 all engaged in activities outside the field of deposit and discount, including a securities or trust business or both. The banks named above as being perhaps purely commercial banks in 1913 have all been caught up in the merger movement and are represented today in institutions that have broad scopes of activities. The National Bank of Com merce was merged with the Guaranty Trust Company in 1929. The Chase National Bank absorbed the Mechanics and Metals National Bank in 1926, the National Paik Bank in 1929, and the Equitable Trust Company in 1930, which had previously absorbed the Seaboard National Bank in 1929; and the American Exchange National was absorbed by the Irving Trust Company in 1926. v It is difficult to find a statistical measure that will demonstrate the proportion of a bank!s business which is commercial and that which is not. If the volume of loans and investments be taken as a measure of the size of a commercial business, it would not be fair to compare total trusteed assets with that magnitude in order to measure the relative importance of trust and commercial business. In the same way the amount of loans and investments does 2 not compare directly with the volume of originations or participations. If it were possible to segregate the proportion of gross and net in come which arises from various activities, a common denominator would be at hand. However, earnings and expense statements made to authorities in 1913 did not supply much detail, and as a matter of fact the Comptroller has des troyed those for years earlier than 1919. Moreover, current earnings and expense statements are subject to much variation from bank to bank in the allocation of gross income among the following items on the official blank: (a) Interest and discount on loans (b) Interest and dividends on investments (c) Interest on balances with other banks in United States and in foreign countries (d) Domestic exchange and collection charges (e) Foreign department, except interest on foreign loans and bank balances (f) Commissions, brokerage, and underwriting fees (g) Trust department (h) Profits on securities sold (i) Other earnings Income under items (a), (b), (c), and (d) may be regarded as largely from commercial business, while foreign department income (e) may be largely commercial although some of it may not be. Commissions, brokerage, and under writing fees (f) njay not be wholly connected with securities business as commissions can arise from a purely commercial transaction such as for acting as an acceptor of a bill. Income from the securities business conducted in separate securities corporations may never appear on the earnings and expense statement of the parent bank, and the separate earnings of securities companies are not generally published or even available to authorities. Trust department income (g), of course, may be regarded as arising wholly outside the field of deposit and discount. Profits on securities sold (h) may relate to activities 5 - 3- in connection with acting as a dealer in securities although they may arise out of sales out of a portfolio representing the investment of surplus funds, - not necessarily a non-commercial banking transaction. Because of these variations, the following percentage distribution of the gross income of five of the largest New York" City trust companies for the year 1930 can be used only as a rough indication as to the relative importance of various styles of activities: Gross earnines Bank "A" Bank "B» Bank »C" Bank '«DM 3ank "E" (a) Interest and discount on loans 61.22$ Interest and dividends 0>) on investments 9.13 (c) Interest on balances with other banks in U. 3. and in foreign countries .43 Domestic exchange and (4) collection charges - .01 (e) Foreign department, ex cept interest on foreign loans and bank balances .07 (f) Commissions, brokerage, and underwriting fees 30.03 7.51 (g) Trust department (h) Profits on securities sold - .50 2.12 a) Other earnings Total gross earnings Total of all five banks 54.18$ 63.03$ 60.05$ 57.07# 59.78# 12.26 13.31 19.48 22.06 14.67 .16 .50 .82 .20 .44 .02 .12 .02 3.85 3.69 1.31 2.12 30.53 — 4.59 12.76 4.14 6.64 1.57 3.06 9.66 7.15 3.61 9.26 1.96 2.02 3.14 5.17 9.44 2.28 3.88 100.00# 100.00$ 100.00# __ , 100.00# 100.00# 100.00# Neither the Chase National Bank nor the National City Bank were included in the above tabulation as the' earnings reports are in the Comptroller's office and not as easily available as those of the member trust companies, which are in this building. portion Moreover, in the case of both of these banks the major pro 9ecur^ y business is in subsidiaries and would not appear on the J ~ earnings report of the hank. 4. - In the case of the National City Bank, the trust business is also in the hands of a separate corporation. The totals show that in the case of the five banks combined the items (f) (g) (h) and (i) account for 23 per cent of the gross income. The aggregate of these items rep* resents income arising largely from activities outside the field of deposit and discount. Several of these trust companies also have subsidiaries carrying on a securities business or other activities, the income from which may not be in cluded in the earnings reports of the trust companies. * * » * * «»***< * x y * * x * Many commentators of recent years have alluded to changing styles in American finance with respect to the inclination of corporations to raise funds from stock and bond issues rather than through short-term instruments. For example, Eugene Stevens in an article in the American Bankers’ Association Journal of October, 1931, said: •’The corporation which formerly borrowed seasonally from its bank on its commodities has in numerous instances financed itself permanently by the sale of its stocks and bonds to an eager public during these years of increasing individual wealth seeking investment. That corpora^tion no longer borrows from its bank, thereby giving the bank eligible and liquid paper — it is more likely at certain seasons of its year to be competing with the bank as a lender of money. Some of our great cor porations, who thus have financed themselves publicly on the basis of an inflated prosperity in capacity, in volume, and in prices of commodities, may now find themselves in possession of working capital substantially in excess of their normal needs, and thus they are engaging to some extent in the banking business as lenders of money, a purpose for which they were not constituted and for which their stockholders did not make their investments. The amount of call loans on the New York Stock Exchange for others than banks in 1929 reached the enormous sum of $3,825,000,000, and a substantial portion of this came from the corporations. MIt might not be amiss for some of them to consider the redistribution of a part of this excess working cash capital in special dividends to their stockholders, who probably need it more than the corporation does, to pay their individual debts accrued in buying the stock or to be used for the purchase of goods they require. Or, possibly, such a corporation might wisely use some of this excess cash capital in buying back from the open market some of its own stock and retiring it, not without benefit to it self, its stockholders, and the markets.'* Serious efforts to measure statistically the tendencies of the sort above described have not come to our attention, but a few facts, which throw some light on the matter suggest themselves. The Bureau of Internal Revenue in its statistics for the past few years has been presenting some aggregate balance sheet items for corporations filing tax returns. According to the books of manufacturing, mining, and public utility companies, such short-term obligations as accounts and bills payable decreased by 13 per cent between 1925 and 1928. On the other hand, such long-term obligations as bonds and mortgages increased by 30 per cent. During the past few years security paper came to represent a larger pro portion of bank assets, as is well known. Tor example, loans on securities plus investments in reporting member banks accounted for 53 per cent of total portfolio on the basis of averages of weekly figures in December, 1919, and 48 per cent in December, 1921. The ratio was appreciably higher ten years later, being for December, 1928, 59 per cent, and for December, 1930, 63 per cent* • •-■- \ s \j (November 27, 1931) PRELIMINARY V M C & ffllS M FOR THE OPEN MARKET POLICY CONFERENCE, NOVEMBER 30, 1931. In the past three months the United States has gone through an extra ordinary financial crisis in which were combined the largest gold export movement in the history of the country and a heav' domestic withdrawal of currency contin uing a movement of almost a year’s duration. These foreign and domestic drains upon bank reserves were met in the classic way by increases in discount rates com bined with a policy of free lending. This is the method of meeting such an emergency described by Walter Bagehot in his Lombard Street in the following terms: "Whatever persons - one bank or many banks - in any country hold the banking reserve of that country, ought at the very beginning of an unfavorable foreign exchange at once to raise the rate of interest, so as to prevent their reserve from being diminished farther, and so as to replenish it by imports of bullion. "A domestic drain is very different. Such a drain arises from a disturbance of credit within the country, and the difficulty of dealing with it is the greater, because it is often caused, or at least often enhanced, by a foreign drain. Times without number the public have been alarmed mainly because they saw that the banking reserve was already low, and that it was daily getting lower. The two maladies - an external drain and an internal - often attack the money market at once. What then ought to be done? "In opposition to what might be at first sight sup posed, the best way for the bank or banks who have the custody of the bank reserve to deal with a drain arising from internal discredit, is to lend freely. The first instinct of everyone is the contrary. There being a large demand on a fund which you want to preserve, the most obvious way to preserve it is to hoard it - to get in as much as you can, and to let nothing go out which you can help. But every banker knows that this is not the way to diminish discredit. This discredit means, ’an opinion that you have not got any money,* and to dissipate that opinion, you must, if possible, show that you have money: you must employ it for the public benefit in order that the public may know that you have it. The time for economy and for accumulation is before. A good banker will have accumulated in ordinary times the reserve he is to make use of in extraordinary times." 221 2 In recent weeks these methods of dealing with the acute situation proved effective: the gold drain came to an end and was in fact reversed early in November and domestic currency withdrawals slackened. The drain itself and the remedies which it became necessary to apply,wrought, however, a profound change in the banking and credit situation. The results of these events on the countrj^s financial position may be summarized as follows: 1, Gold. The country’s gold stock is reduced by $600,000,000, and now stands at about $4,400,000,000-, serious? This loss of gold is not it had long been expected that at some time large gold exports would occur. There is plenty of gold left, since we still have about $1,500,000,000 in gold in excess of minimum requirements. Moreover, foreign short term funds in this market have now been re duced to a point where they are now covered by our excess gold quite apart frcm our credit balances abroad. 2. Federal Reserve Credit. As a result of gold exports and currency withdrawals the total amount of Federal reserve credit in use has been expanded from about $1,000.,000,000 to about $2,000,000-,000, This change in itself is not disturbing. It was normal that when gold left the country the Reserve System should be called upon to replace in the market the funds withdrawn. Moreover, it seems reasonable to anticipate a return of the volume of Federal reserve credit to figures comparable with the averages of recent previous years. For money in circulation is now $1,000,000*000 larger than appears to be required by the active business of the country, and when habits of hoarding are broken a considerable part of the extra money outstanding may be expected to return to the Reserve banks and in the process repay Federal reserve credit. 3 Meanwhile large volume bills. of Member the elements requiring discounts and the banks now borrowing are large scrutiny holdings about of are the bankers $675,000,000. Such a volume of discounts has always in the past been ac companied by relatively firm money conditions and some pres sure upon credit, as illustrated in the accompanying chart. Member banks which are in debt are constantly seeking some means by which they may get out of debt and are reluctant to make loans or investments liberally. The existence of this volume of discounts is today more than usually an important element in the credit situation. This is especially true because of the nature of distribution of discounts: the New York City banks are carrying less than their usual share of the load, and banks in the interior are carrying more than their usual share. The credit pressure in certain interior districts is, therefore, severe. In addition to relatively large discounts the Reserve banks now hold about half of the total volume of bills outstand ing. It was fortunate that the crisis found the member banks supplied with large holdings cf bills by the use of which they were able to secure Federal reserve credit, and thus to that extent avoid the necessity of borrowing with its accompanying pressure. Under these circumstances the proportion of bills in the Reserve System does not appear excessive, but on the contrary helpful to the general situations. 3. Money Rates. An increase of 2% in the discount rate of the New York reserve bank and sharp increases in member bank dis counts was accompanied by substantial increases in the general 7.Z-U ol r Pepo; ic rl . 'V'7,-i&a;. 4 level of money rates as indicated below. MONEY RATES AT NE7/ YORK Aug. 31, 1931 Stock Exchange call loans Stock Exchange 90 day loans Frime commercial paper Bills - 90 day unindorsed Customers* rates on commercial loans Treasury certificates and notes Maturing December 15 (yield) Maturing March 15 (yield) Federal Reserve Bank of New York re discount rate Federal Reserve Bank of New York buying rate for 90 day indorsed bills Sept.30 , Oct. 30, 1931 1931 1 1/2 1 1/2 *1 1/4-1 1/2 2 1/2 2 2 7/8 1 1/4 x3.44 x3.33 2 1/2 *3 1/2-4 3 3/4-4 lA 3 1/4 x3. 67 Nov. 27, 1931 2 1/2 *3-3 1/2 3 3/4-4 3 x4* 50 .34 .48 .85 1.17 1.48 2.32 1.10 1.87 1 1/2 1 1/2 3 1/2 3 1/2 1 1 1/4 3 1/8 3 1/8 * Nominal x Average rate of leading banks at middle of month. 4. Public Psychology. The upsetting of the gold standard in London, together with the threat to the dollar was a powerful disturbing factor to public pschology both in this country and abroad, the results of which are impossible to measure. One re sult was certainly to make bankers and others more timid and re luctant in contemplating nev; uses of funds or new enterprises, or even the maintenance in some cases of existing credit lines. 5. The Bond Market. Following the sharp increase in money rates, the pressure upon the banks, and the psychological in fluence of all these bond price averages dropped 6 to 10 points in a few weeks. The simultaneous movement of interest rates and bond yields ars shown in the accompanying chart. This movement in bond prices is of particular import ance because of the weakened position 6f many banks. A few points difference in bond prices may make the difference between the solvency or insolvency of no inconsiderable number of banking institutions Federal Rooerve Bank of Now York Reports Department Xt> 9193 I. 1927 1928 1929 1930 1931 J 5 Broadly speaking the effect of these developments was to place additional credit pressure upon a situation already uncertain, to make banks more reluctant to lend and invest at a time when they were already reluctant, and in particular to worsen the position of many banks. At the end of October and early November, following the establishment of the National Credit Corporation, it looked for a time as though a turn might have been reached in the business and financial situation. But that hope now appears to bo dissipated and there is no convincing evidence of recover. To a considerable extent the basic forces operating upon the present financial situation are political and industrial, and thus outside the immediate influence of the Federal Reserve System. But with respect to the volume of redis counts and their pressure upon the situation, the influence of money rates, and the general attitude of the financial community, the Reserve System exercises an in fluence which is or may be important. There are now two major problems for the Reserve System - the long time policy and the policy to deal with events of the year-end. The first of these Questions is so largely affected by the large movement of funds at the year-end, and again by the normal tendency for currency to flow back in January, that it seems difficult to deal with broader questions of policy before the first of the year* In the meantime the year-end offers problems deserving of full attention. YEAR BHD PROBLEM Currency demand and large bill maturities may require something over $500,000,000 of new Federal reserve credit in some form by December 23. The fol lowing rough estimates may be made although the many complex factors in the present situation necessarily make estimates most uncertain. ■i * 6 (In Millions of Dollars) To Meet Currency Demand, December 2 '« 9 ♦’ 16 M 23 50 80 120 220 To Meet Bill Ma turities Total 135 210 290 350 195 290 410 570 While the maximum figures are likely to be for the few days before Christmas, the year-end will also offer a complicated and perhaps difficult situation bedause of the sensitiveness of many banks and their customers to any borrowing position which yeaf-end reports may show, at a time when the volume of discounts is so large. In view of the considerable amounts of currency now outstanding in excess of estimated normal demands the Christmas increase in currency may be smaller than usual. It seems unsafe, however, to count upon this since any increase in bank failures would further increase currency requirements* The ldfge bill maturities reflect heavy purchases of bills by the Reserve system in September and early October* It is improbable that the full amount of these maturities can be re placed frotn offerings of bills to the Reserve banks in coming weeks* The member banks now hold somewhat limited amounts of bills and at present rates there is going forward a considerable distribution of bills outside the Reserve banks. In the past week adjustments of rates have been made which should make possible the maintenance of present market rates throughout the balance of the year and give reasonable encouragement to the offering of bills to the Reserve banks especially under repurchase agreement. Hiring the past week the dealers have raised their rhtas to 3 l/8$ bid, 3$ offered. The New York Reserve bank some days ago reduced its 1 to 45 day buying rate to 3$, and reduced its Carrying rate to 3$ this past week so that the mafket rates and oui4 own buying rate are in a reasonable relation ship* Even with these adjustments it seems clear that there will be a considerable gap to be filled in some other way than by bills* The two methods deserving of thorough Consideration appear to be, first, a discussion with the banks in important • * , p centers as to their willingness to show borrowing on their year-end statements, and second, provision for year-end purchases of government securities similar to those made last year* * \ j / / k v, * x . / > / V I l VOLUME 221 PAGE 7$ October 9,1931* Governor Beyer Respects is which Federal H * * * m Board could broaden c U i m s o f eligible paper without amendment to the law* M r* Wyatt, General Counsel* c o m SL3JM la his statement of October 7, 19311 the President said: 1 "4. shall propose to the Congress that the t l t e i b l U t t ^K>ylaiftfiE ot th« odgraj. r«a»rTa act afawla b* t o o a d w d In ord*r to «1»« groator liquidity to tho assets of the beaks, and thus a greater assurance to the bankers in the granting of credits by enabling the# to o b tain legitimate accommodation o n sound security in times of stress** Zt has occurred to me that, in Ties of the present emergency, it might be advisable for the federal Reserve hoard to consider in what ns speots the present provisions o f its regulations could be amended so as to broaden the classes o f eligible paper without waiting for Congress to amend the lam* A a annou ncement by the Federal Reserve Beard of amendments to its regula tions having this effect might be of great psychological value and certain possible amendments might have material practical advantages in the present emergency, I therefore respectfully invite your attention to the followi respects in toich certain provisions o f the Board*s Regulation A, which place restrictions upon rediscounts, could be modified without any acandgent to the law, p m Without any amendment to the law the Board could grant blanket permission for member banks to rediscount paper acquired from non member banks, as it did from duly 27, 1921 to June 26, 1923, «* « — In n c n m i times. member banks which act aw c i v coirttspoLdeat* for mmmzber banks can ask* leant to *nch noaaetuber banks against thwlr bill* rectiiTibit and then borrow fro& the Tedwrsl reserve bank again*t Government b o u t:* u n i o llg it lo c a s te a e r*. n o t h& ve la o n o tg h c u s tc & e a rs to p o n d e iit a j a *» d r o c is ic o iU it • • a t f e lo n o f g r a n tin g o r lo o d lf jf fo r th w p e p e r a c q u ir e d . - ra s e n t i t Us m ig h t bo u c ts u * b a r ouch ^ r t & ls n io n o r c X i£ til« o f h e lp f u l th e banka th » fro m c it y fc h * ir c o r r e a i> o * a a * n t « p ever a c q u ir e d fro & . a # ? i*d a e f c o u n try t h e ir th w lr to g ra n t b la n k e t : » n d * * i« » i S h in c s u ld ha by p e r w in a lo a ; o f sea b o r h o w e v e r. c s rc o o x is : p a p e r . (b ) in ta k a v e *y b la n k e t •b o th u i X X such -^ e rg e n c y , C c v m r s n e iii b o n d s o iu ib i* by F iv ^ u la t lo n 4 *g « k , p a r t i c u l a r h u t A *, i t w o o id v h ia h dona ha a r e q u ir e s w r it t e n ow n c o rre s * fo r p u b lic a d v is a b le aay tt> th e s ta te * r o p c M il t i^ U e A * esse. a x a m a m js L .motion IT (b) nmkes Certain eltiwee* of paper IneiS&lble for rediscount utiUeu u reoaxst financial abatement of the borrower it on file with the Kwiibar bank* 1 believe that thi* in a *oot* requirement! but it aaddttbtally has tba effect af aakia? ineligible wuco paper which oto*rwise would ha eligible, beeautse the asmber bank* hate neglected to obtain fin*.£ctr*l st&tcaeatt of tht fcorrewar*. This 1* particularly important in the case af &*sbfr basic* which haw* lean in the habit of borrowing free their city correspondentc and now find It as******? to ap$Oy to the federal n u m bank for the first tit*e. 1* an omsrgenry measure, the Board might consider the advisability # of repealing the second, third, fourth and fifth paragraphs of Subdivision (b) of Section IT. leaving only the first and last paragraph* of that M o t i o n . ?be requirement la the last paragraph that. «A Federal reserve bank may. la 4 - 3 - any cass, require the financial statement of the borrower to bo filed with It*. would seen to afford sufficient protection In this respect id the pros* eat emergency* LIM1 TAT IQS OM SISCCUHT^ K f t JKB0ERA1 I M m i S M A T S C B M f M a Section VI (d) contains the following restrictions! 1. n a a m u m i the w n i s a l o n of the J s ^ r a L J ^ i e m L - M M A . no federal reserve bank shall discount paper for any M o r a l intermediate credit bank shea Its own reserves amount to loss than 50 per cent of Its o»n aggre gate liabilities for deposits and Federal reserve note# In actual circulations * ead 2. ‘ aw at tha u w r r , Board, tbm w » n c U » l a a o f tbs aggregate amount of paper discounted by all federal reserve banks for any one federal intermediate credit bock shall at no tine exceed a n amount equal to the paid-up a nd unimpaired capital and surplus of such federal Intermediate credit bank,M . Without any ace a dm m t to the law or the regulations, these 1 ini tac tions could be modified by the issuance of a public statement granting blanket permission for federal reserve banks to rediscount pepsr for federal inter mediate credit beaks nets! the tending these limitations, u m l o d g e s M J k i& jm m m * Section VI (e) provides, in pert, that, "The aggregate amount of notes, drafts, bills of exchange, and acceptances with maturities la excess of six months, but not exceeding nine months, which may be discounted by any federal reserve bank shall not exceed 10 per cent of its total assets,’* tt&llft this probably Is of little practical importance, a n amendment abolishing or ao<ylng this restriction might have a good psychological effect, COMCttJ&ICX. At this s w e a t l an not prepared to recommend any of the above modi* lcation* o f the hoard's regulations; bat I respectfully submit the sat tor for your con si do ration* Jbr year further Information, X respectfully submit hereeith a copy of Bagulatton A with the provisions referred to above narked, and copies of the Board1* circular letters of July 2?, 1931 (X-3176) and July lb, 1933 (&»37b4) with regard to rediscounts for nonmetsber banks, Bocpoatfally, talter tyatt, i.eaerul Counsel, Begulatlon and circular letters attached. Office Correspor ence To.____ i-e^ a F o r m N o . 131 FEDERAL RESERVE BOARD Mr, Wyatt- General Counsel. F r o m _____ Mr. Seitz__________________ Date Dec. 15,1931, Subject; Positions Board has taken re value of Government securities. 2—8495 In accordance v»ith your request, there are summarised below the various positions which the Federal Reserve Board has taken from time to time with reference to the question whether Government secur ities given as collateral to member banks' promissory notes or as collateral to paper rediscounted by one Federal reserve bank with smother, should be valued at par or at current market price. The only kinds of Government securities with which the Board was con cerned from the standpoint of value were Liberty Bonds and Victory Notes and, therefore, wherever the term "Government securities" is used below it refers to these particular classes of obligations, SUMMARY The Board's first circular letter on this subject was that of January 2, 1920 (X-1784), wherein the Governors ana Chairmen of all the Federal reserve banks were advised that the Board concurred in the suggestion which a Federal reserve bank made to a member bank that credit for Government securities which it had purchased in the open market and wished to use as collateral to its 15-day note, should only be allowed at the market value of the securities. The next and final circular letter the Board sent out was that 1 of June 15, 1920 (X-1954), wherein the Chairmen of all the Federal reserve banks were instructed that collateral notes discounted by one Federal reserve bank for another should be fully secured from the VOLUME 221 PAGE 83 - standpoint of market value. 2 - These instructions were modified to some | extent by a plan which the Board sent to some of the federal re serve banks under which they could discount for another "Federal re serve bank, notes of member banks secured by bonds at their par value, but would only pay the offering Federal reserve bank an amount equal to the market value of the bonds, the difference be tween such market value and the face of the notes being retained un til payment was received on the notes. The 3oard. later instructed certain of the Federal "Reserve Agents that, in issuing Federal reserve notes against bond secured collateral, they should insist that the market value of the bonds equal the face amount of the notes tendered as security for the Federal re serve notes. Subsequently, a few Federal Reserve Agents were advised that they could for a short time accept as security for Federal reserve notes, member banks' notes deficient in market value collateral, if the margin of collateral carried by them against issued Federal reserve notes equalled or exceeded the difference between the market value of the Government bonds and the face of the notes which the bonds secured. It also appears that the Board advised a few of the Federal reserve banks that they should bring about a condition whereby their transactions with member banks would be fully secured with market value as a standard. Furthermore, the Board later gave advice to two of the Federal reserve banks which in effect authorised the temporary rescission or suspension of all requirements which it had previously imposed upon these Federal reserve banks -3- The Board's records on this general subject are not complete in some instances, but, except as to those Federal reserve agents and Federal reserve banks to whom or which the specific advice or instructions above re ferred to had been given, it would seem that the only general requirement the Board issued was -chat which was laid down in circular letter X-1954. D IS C U S S IO N The question of the value of Government securities when used as collateral was first presented to the Board in December of 1919, by Mr, Heath, federal Reserve Agent at Chicago, Mr* Heath asked whether (l) he could accept as collateral for Federal re serve notes a note of a member bank secured by Government securities at their face value when he had knowledge that the securities had been purchased by the member bank at less than par, and (2) the Fed eral reserve bank could loan against Government securities at par when it knew that such securities had been purchased at a discount. Under date of December 27, 1919, Governor Harding replied that: (1) The member bank's note is the collateral upon which Federal reserve notes are issued and that they may be issued upon the face value of the member bank's note even though the Government securities securing it are selling below par. fhe Board, however, later gave advice to some of the Federal reserve agents, including the Federal Reserve Agent at Chicago, which is directly opposed to that - 4 - which it gave in this particular instance. (2) The Federal Reserve Bank could lawfully make an advice to a member bank on its notes secured by Government securities even though such securities might be below par. Subsequently* Mr. Heath advised that his inquiry was occasioned by the action of a member bank in buying Government bonds in the open market below par and using such bonds at their par value as security to its promissory note which it presented to the Federal Reserve Bank of Chicago* Mr, Heath stated that in this particular case the needs of the member bank were taken care of; but when it was suggested to the member bank that, because its acquisition of the bonds was in the open market, it should either deposit additional collateral to margin the transaction up to 100$ or reduce it to the market value of the col — .lateral, the member bank agreed to comply with the suggestion* In replying under date of December 31, 1919, Governor Harding said: "The Board takes the view that the attitude of the Federal Reserve Bank was entirely sound. The ^ underlying principle of a collateral loan is that aside from the value of thg .make r *s name from a moral standpoint the chief reliance for security is placed upon the collateral, and collateral notes pro vide as a rule for the maintenance of a certain margin and for the calling for additional security should the market value of the collateral decline. "We are now getting away from war financing and from the principles which governed the Federal Reserve Banks in facilitating such financing* It is quite probable that there are no longer existent any commitments to carry securities, and the Board feels that it is sound bankii^ policy "to require notes secured 07 Government bonds to be lim ite d to the market value o f the bonds. It assumes* o f course, that i t i s not the p o lic y o f the fed era l Reserve Banks, as i t c e r ta in ly is not the Board1s p o lic y , to do anything to r e f l e c t on the value o f Government o b lig a tio n s , but the banks have already e sta b lish e d higher r a te s o f discount fo r paper . secured by Government bonds than v-ere in e f f e c t several months ago and the adoption o f a w e ll-e s ta b lis h e d bank ing p r in c ip le as to adequacy o f c o lla t e r a l does not c o n s titu te , and should not be regarded as any re f l e c t i o n upon the c o l l a t e r a l i t s e l f * " The f a c t s o f Mr, H eath 's l e t t e r and the tex t o f Governor Hard in g 's reply were sent in the fo u r o f a c ir c u la r l e t t e r on January 2 , 1920 (X -1 7 8 4 ), to the Chairmen and Governors o f a l l the Federal reserve banks. The language used i n th is l e t t e r is general in i t s terms and somewhat m islead in g. In other words, i t might be in terp re te d as re quiring that a l l notes o f member banks secured by Government bonds should be f u l l y secured with market value as a c r it e r io n when taken by Federal reserve banks; and the fo llo w in g excerpts from two l e t t e r s which were addressed to Senator Chamberlain under dates o f February 2 and 7 , 1920, seem to in d ica te that the Board intended the l e t t e r to require such se c u rity at le a s t in cases where the bonds had been purchased at l e s s than pars "Tour correspondent has quoted c o r r e c tly a part o f a c ir c u la r l e t t e r sent to a l l Federal Reserve Banks by the Federal Reserve Board under date o f Janu ary 21 , (2 ) 1920. I t has come to the knowledge o f the Beard that banks and in d iv id u a ls have been buying Government bonds at the market p rice and then sought to rediscount notes with the Federal reserve banks fo r the ‘ "the full face value of the bonds attached as security. The Board has been informed of an in stance where bonds of the face value of $100*000 were bought at around $92,000, and the purchaser then desired to borrow $100,000 on the security of the bonds. I think you will agree with me that it is necessary to put a check on transactions of this kind*1’ (From letter of February 2, 1920,) MI have received your letter of the 4th in stant and have discussed it with my colleagues on the Federal Heserve Board, "Fnile the Eoard is anxious to do everything that it can consistently to sustain the value of Govern ment bonds, and while it believes that present conditions are only temporary and that the bonds are worth in trinsically much more than present quotations and will ultimately go to par or better, it feels, nevertheless, that it would be a very unsound policy to -permit the Federal reserve banks to make loans up to the face value of the bonds in cases where it is known that they have . been bought at the -prevailing discounts. In view of pres ent conditions, it seems to the Board that any attempt to stabilize the bond market by artificial measures, either as to the value of the bonds or discount ♦rates on paper secured by bonds, would be an incentive for borrow ing on a vast scale resuiting in further Expansion and further disturbance of price levels, and if carried to extreme would jeopardize our credit structure, « (From letter of February 7, 1920.) On the other hand, letters which the Board later addressed to certain of the Federal reserve agents (hereinafter referred to) clearly show that the Board had never intended to prescribe the terms on which Federal reserve banks should take notes from member banks which were se cured by Government obligations. It appears, therefore* that the pur pose of X-1784 was merely to bring to the attention of the other Federal reserve banks the fact that the Board approved of the position which the - 7 - Federal Reserve Bank of Chicago had taken in the case described. On May 27, 1920* Mr. Heath suggested that he should not ac cept as collateral to Federal reserve notes any paper which was not se cured by Government securities at their market value; and on May 28, 1920, Governor Harding sent him the following telegram which had been approved that day at a Board meeting: "Board believes that inhere you accept collateral notes as security for Federal reserve notes issued to Federal Re serve Bank, that collateral security securing such notes should be accepted on basis of market value, and Board ap proves your contemplated action"* The Board of Directors of the Federal Reserve Bank of Chicago then in structed its Governor and Federal Reserve jigent to bring about a condi tion whereby loans on collateral would be based on its market value; and on June 4, 1920, the Federal Reserve Bank of Boston also advised that it had adopted a similar policy*. On June 11, 1920* Mr* Morss, Governor of the Federal Reserve Bank of Boston, advised that his bank had discounted for the Federal Re serve Bank of Richmond certain notes secured by Government securities and that, figuring the value of the collateral at the market price, there was a deficiency of approximately 7$. He stated that Federal reserve notes were issued against such notes and collateral for the fall amount of the notes, and requested advice as to whether his bank should require collater al from other Federal reserve banks at more than the market price. - 8 - The question presented by Governor Mores was considered by the Board at its meeting of June 15, 1920, and as a result, Governor Harding on that same day transmitted a circular letter (X— 1954) to the Chairmen of all the Federal reserve banks advis ing as follows: '•The Beard has considered this question and desires that all Federal Beserve Banks be informed that they are expected in their discount transac tions for other Federal Reserve Banks to require that all collateral notes discounted be fully se cured, that is, that the market price of the col lateral be equal to the face of the notes. The Board would suggest, however, that federal Re serve Eanks which hold collateral notes discount ed for other Federal Reserve Banks give the borrow ing banks a reasonable time, say until July 1st, to make good any deficiency in collateral*» On June 25, 1920, in accordance with action taken by the Board at its meeting of the preceding day, Governor Harding advised the Federal Reserve Agent at Atlanta to the following effect in con nection with an inquiry he had made regarding the value of Government bonds: "You are advised that after careful con sideration of the matter the Board has reached the conclusion that in receiving collateral notes from a Federal reserve bank as security for Federal reserve rotes, a Federal reserve agent should’satisfy himself that the market value of the collateral is equal to the face of the notes tendered as security for Federal - 9 ~ reserve notes*" Governor Harding also stated: "While the Board does not undertake at this time to lay down any rules to govern the of ficers and directors of Federal reserve banks in pass ing on the value of eligible paper offered for dis count, it wishes to point out thp.t acting through the Federal Reserve Agent it has the right ’to grant in whole or in part, or to reject entirely the application of any Federal Reserve Bank for Federal reserve notes’, and has, therefore, the right to give a Federal Reserve Agent general instructions to guide him in passim on the notes, drafts, bills of exchange, etc* offered by a Federal reserve bank as collateral security for Feder al reserve notes." Under date of June 24, 1920, Governor Harding said the follow ing to the Federal Reserve Agent at Kansas City:"so far the Board has been inclined to the view that each Federal Reserve Bank should determine for it self the terms on which it will take notes secured by government obligations. It is of the opinion, however, that Federal Reserve Agents should not take from the banks collateral notes as security for Federal Reserve notes unless the market value of the collateral is equal to the face amount of the note pledged." -10- Similar advice was given to the Federal Reserve A g e n t at Dallas by Governor Harding in a letter dated June 26, 1920. It was stated that while the Board felt it desirable that all collateral should be valued at its market price "it has not so far undertaken to determine such a policy for the Federal reserve banks in their own transactions with members" but "that Federal Reserve Agents in taking notes from their members to secure Federal reserve notes should feel assured that the market value of the security held as col lateral for notes is equal to the face of the notes." These three letters show conclusively that the Board had never laid down any rules governing transactions between Federal reserve banks and their member banks and, therefore, support the conclusion that cir cular letter X-1784 merely advised the Federal reserve banks of the po sition which the Federal neserve Bank of Chicago had ta--en in the case described. On July 6, 1920, the Governor of the Federal Reserve Bank of Boston advised that his batik had discounted paper for the Federal Re serve Bank of Dallas which was not secured "on the basis of your letter" (X-1954)• He stated that the Dallas Bank had informed him that its di rectors were averse to changing its policy ol tailing notes secured by Government bonds at the face value of the bonds and tnat it had offered to give additional collateral in the form of member banks* notes se cured by Government bonds to make up the deficiency in the notes dis counted. Because the Dallas hank did not give its ora note to the Boston hank, the Governor of the latter hank felt that the additional collateral bank, should be deposited with some form of agreement to pledge it for any debts owed to his bank by the offering Federal reserve banl-qj and he -1 1 - submitted this propositi® to the Board for its consideration. As a result, i.lr. Logan, the Board’s General Counsel at that time, was requested to give his opinion as to the legal considerations involved in the following plan : Federal Beserve Bank A desires to rediscount with Federal Beserve Bon B^15- day notes of member banks aggregating $5,000,000 which are secured by Government bonds of a face amount of $5,000,000, but of a market value of only $4,500,000. The latter bank desires to make such discount but wishes to abide by the terms of circular letter X-1954. It was proposed, therefore, that both banks agree that Bank B pay for the notes by transferring $4,500,000 through the Gold Settlement Fund and crediting the account of Bank A with $500,000 on the books of Bank B, it being understood by both banks that this credit was to protect Eank B for any deficiency in the market value of the collateral, and that Bank A would not dfaw upon it until Bank B had received payment on the notes discounted. Mr. Logan also considered the question whether, if Eank should fail after such transaction had been carried out, Bank B could set off against the $500,000 credit the liability of Bank A as indorser of the notes rediscounted; and, in the memorandum he addressed to Governor Harding under date of July 20, 1320, discussing this plan, he con sidered that the asset of Bank A was a debt due from Bank B; and Bank B had the right to offset against this debt any debt from Bank A to it. He held, therefore, that no special agreement between the two - 12 - federal Reserve Banks was necessary to give Eank B protection under the $500,000 credit. Mr. Logan also stated that: "In order to comply with the present requirements of the Board with regard to collateral security for Federal reserve notes, the Reserve Agent for Federal Reserve Bank B should issue Federal reserve notes against the collateral notes rediscounted for Federal Reserve Bank k only up to the market value of the security behind such collateral notes. In other words in calculating the collateral for Federal reserve notes collateral notes secured by Liberty bonds and Victory notes should be put in at the market value ’of the security held therefor." The details of this plan together with Mr. Logan's comments were sent to the Governor of the Boston bank and he advised that the plan would be put into operation the next time his bank discounted for an other Federal Reserve Bank notes which were deficient from a market value standpoint. The plan was also sent to the Federal Reserve Bank of Dallas and paper was subsequently rediscounted by that bank with the Boston bank under the procedure outlined therein; but it does not appear that it was brought to the attention of any other Federal re serve banks at that time. In short, the plan provided that, instead of a Federal reserve bank requiring notes discounted for another Federal reserve bank to be fully secured from a market value standpoint, it discount the notes tendered but pay to the offering bank only an amount equal to the market value of the security, and credit the difference between such market value and the face of the notes to the account of the offering bs.nk to become available upon payment of the notes. It, therefore. * * - qualified down to some in c i r c u l a r extent letter the 13 - requirement which the Board had laid X-1954, In the meantime, the entire question of how member banks’ notes secured by Government bonds should be treated had been under consideration by the federal Reserve Board; and as a proposed solu tion of the problem, a plan (X-1972) was sent by Governor Harding on July 3, 1920, to the [Federal Reserve Banks of Philadelphia, Rich mond, Atlanta and Dallas, in whose districts the bond question was most important. That plan suggested that the [Federal Reserve Banks mentioned establish preferential rates for 15-day notes of member banks secured by Government bonds if they were willing to adopt the policy of de clining to discount these notes unless they were secured by bonds of an equal market value which were actually subscribed for and owned by the borrowing bank or token by it from defaulting subscribers before a certain designated date. If the notes were not so secured the deficiency was to be made up by the pledge of additional United States bonds or notes, or by such notes, drafts, etc., as were eligible for purchase or rediscount by Federal reserve banks. The Federal Reserve Banks of Philadelphia and Richmond were strongly opposed to adopting any such plan. The Federal Re serve Banks of Atlanta and Dallas, however, submitted proposed changes in their discount rates to the Board for its approval in - 14 - accordance with its suggestions; but after some correspondence with these Federal reserve banks, Governor Harding advised the respective Federal Reserve Agents under date of July 14, 1920, that the approval of the plans "would invite pressure for like action in other dis tricts and there are so many possible complications that (the) Eoard desires further time to investigate (the) proposition from (the) standpoint of (the) system as a whole." These letters, which were substantially the same, were approved by the Board at its meeting of July 15, 1920* Governor Harding referred to the difficulty that would be encountered in the Atlanta and Dallas districts in making effective a policy of requiring full market value security without at the same time making some concession in discount rates, and advised that the Board had decided to modify its requirement covering the issuance of Federal reserve notes in cases where Government securities were in volved* He said: ii* * * ipkg 3 0ar(i realizes, however, that in a few of the districts, including yours, it would be difficult to make this policy effective at this particular time of the year with the absence of some special inducement in the way of a lower discount rate. Therefore pendiig final action on the recommendations made by your Board of Directors and awaiting more favorable condi tions for making the new policy effective, in case the Board should find itself unable to approve the plan recommended, it has been decided for the present not to require you as Federal Reserve Agent to insist that each collateral note offered by * * * (your) Federal Reserve Bank * * * as security for Federal reserve notes be in itself fully secured, but you should re quire that in each instance the aggregate of notes, (counting collateral notes as being worth the market value of the bonds attached thereto) be equal at least to the amount of Federal reserve notes released by you to the bonk. The Board’s figures show that at present you have in your possession as Federal Reserve Agent an apparent excess of * * * (amount given) million dollars face value of paper above the amount of Federal reserve notes issued, ^his would indicate that you have ample margin." With reference to rediscount transaction with other Federal re serve banks, Governor Harding said: "In your rediscount transactions with other Federal reserve banks, however, it will be necessary for you to meet the requirements of the banks which rediscount for you. The Board does not feel disposed to compel any Federal reserve bank to discount col lateral notes for another Federal reserve bank which are inadequately secured. Perhaps the easiest way for you to arrange with other banks which may discount for you would be for your bank to leave with the rediscounting bank a balance as an offset. For example, in case you should rediscount five million dollars of member banks’ collateral notes with Boston and the collateral to the notes is worth only four and a half million dollars, it is the Board’s view that you might arrange with Boston to transfer four and a holf million dol.ars for you through the Gold Set tlement Fund and to retain five hundred thousand dollars as a book credit. 'While the five million dollar transaction would go through at the regular rate, the Eoard would have no objection to the lending bank making you the proper reduction on account of the free balance left with it." Y/ith reference to the value of the collateral behind a member bank's note, Governor Harding made the following remarks: "It is the view of the Board that when a Federal reserve bank discounts a member bankas note secured by collateral the market value of the collateral to the note ought to be equal at least to the face of the note discounted.* * * -16- "The Board desires, however, to call the attention of your directors to the desirability of having all member banks* collateral notes fully secured with market value as a standard, and will expect, regardless of any action which may finally be taken on the proposition to reduce rediscount rates, that your officers will be able during the next few months to have all collateral notes fully secured. A copy o°f) these letters was also sent to the Federal He serve Agents at Hew York and Philadelphia. The Federal Reserve Bank of Atlanta seemed to be satisfied with the decision of the Board as above expressed. The Federal Reserve Bank of Dallas, however, through its Federal Reserve Agent, repeatedly urged the Board to approve its preferential rate plan; but on August 4, 1920, the Board wired the Federal Reserve Agent as follOY/s: "The Board is not yet prepared to approve resolution adopted by your board of directors * * * and would suggest that you defer for the oresent and until credit situation eases in your district enforcing requirement that notes secured by Government obliga tions be fully secured on basis of market value, ^ e r a l prop osition will come up for discussion at meetings of xederal Re serve Agents and Oovernors some time this Fall. This advice had the effect of suspending, until after the 1920 Fall Conferences of Federal Reserve Agents and Governors, all requirements '-nich the Board had previously imposed upon the Federal Reserve Bank of Dallas. It does not appear that the Board ever approved either of the pro posed plans referred to above. 1 also wish to call your attention to certain remarks which were made by Governor Harding in a letter he addressed to Mr. Morss, Governor of the Boston bank, under date of August 18, 1920. This bank had been requested by the Federal Reserve Bank of Dallas to rediscount its bond se cured paper at the face value of the bonds and Governor Morss advised Gover nor Harding that he was going to submit the . « « « to the Executive Committee -17- of his bank for its consideration. He also said: "It './ill bring up the question of whether we ought not recede from our position in this District of requiring market value of bonds for collateral. If the New York bank and other banks think it is sufficient -co allow par value on bonds for collateral, why should this District not follow the course, which is more favorable to our member banks?" In replying, Governor Harding said: * * * * * * * It is noted that you intend to put the whole question up to your Executive Committee at the next meeting and the Board will be satisfied to leave the matter entirely to its determination. It is the view of V h e Board that no legal question is necessarily involved when a Federal reserve bank rediscounts for a member bank a customer*s note which has Government obligations attached as collateral, for the note may have been made for one of the purposes outlines in Section 13 of the Federal Reserve Act, and might, therefore, be eligible without security. In any event the Federal reserve bank would have double protection, the obligation of the maker of the note as well* as that of the member bank endorsing it. There may, however, be a legal question involved in discounting a member bank*s collateral note. * * * * * * * * * "It seems clear that a Federal reserve bank could not discount the straight note of a member bank unsecured and that it could not discount the note of a member bank for 3100,000, secured by $85,000 par value of Treasury certificates. ^ question arises, therefore, whether a note of a member bank for $100,000 secured by the same amount par value of Liberty Bonds, which aro actually worth on the market, however, only $85,000 can be legally discounted by a Federal reserve bank, ^n either case it would seem that an advance of $15,000 would be made upon the unsecured obligation of the member bank, which the law does not appear to permit. "However, th e Board i s c o n te n t t o le a v e th e m a tte r to th e d i s c r e t i o n o f your E x e c u tiv e Committee and th e q u e s tio n w i l l be d is c u s s e d a t th e C onference i n O c to b e r." I t would seem that this letter authorized the suspension, until after the 1920 Fall Conferences o f Agents and Governors, of all require ments which the Board had previously iiqiosed upon the Federal Reserve Bank o f B o sto n . - 18 - The question "Should member banks' collateral notes be fullysecured, taking market value instead of face value as a basis" along with certain other related questions were discussed at the October, 1920, Joint conference of the Governors and Agents of the federal re serve banks (pp, 207-229, Part B, Vol* 1 of Stenographic Report of Proceedings); but it does not appear that any definite recommenda tions were made in the premises. Copies of the above mentioned circular letters (X-1784 and X-1954), and memorandum containing the Board's suggestions for prefer ential discount rates on bond-secured paper (X-1972) are attached hereto for your further information. Respectfully, Circular letters and memorandum attached. FEDERAL RESERVE BOARD W A S H IN G T O N A D D R E S S O F F IC IA L C O R R E S P O N D E N C E T O TH E FEDERAL RESERVE BO A R D January 2,1920. X-17SU Subject: Collateral Loans; Relation of Collateral back of Note to face amount of Note* Dear Sir:There is quoted below for your information the text of a letter addressed, by the Board to the chairman of one of the Federal Reserve Banks: "The Board has considered your letter in which you call attention to a case where a member bank buying Government securities in the open market at a discount sought to discount its fifteenday paper with the bonds as collateral at their face value. You state that when the situation was made cleai: to the member bank that as the transaction was an open market one and the bonds had been pur chased at a discount additional collateral should be deposited in order to margin the loan up to one hundred per cent., or else the loan should be reduced to the market value of the collateral, it recognized the propriety of the suggestion and agreed to comply with it. The Board takes the view that the attitude of the Federal Reserve Bank was entirely sound. The underlying principle of a collateral loan is that aside from the value of the maker's name from a moral standpoint the chief reliance for security is placed upon the collateral, and collateral notes provide as a rule for the maintenance of a certain margipr^l^r the calling for additional security should the market value of the collateral decline. V/e are now getting away from war financing and 1 -3r X-176U from the principles which governed the Federal Reserve Bonks in facilitating such financing. It is quite probable that there are no longer existent any commitments to carry securities, and the Board feels that it is sound banking policy to require notes secured by Government bonds to be limited to the«*market value of the bonds* It assumes of <K>ursS£b that it is not the policy of the Federal Reserve Banks, as it certainly is not tiie Boara^s policy, to do any thing to reflect on the value of Government obli gations, but the banks have already established higher rates of discount for paper secured by Government bonds than were in effect several months ago and the adoption of a well-established banking principle as to adequacy 01 collateral does not constitute, and should not be regarded as any re flection upon the collateral itself.'* i Very truly yours, Governor. tetter to Governors and Chairmen of all F.R, Banks FEDERAL RESERVE BOARD W A S H IN G T O N A D D R E S S O F F IC IA L C O R R E S P O N D E N C E T O TH E FEDERAL RESERVE BO ARD June Subject: 15,1920. X- 195U Value of Security for Collateral Notes Rediscounted. Dear Sir:The Governor of a Federal Reserve Bank: has advised the Board that his Bank has discounted for another Federal Reserve Bark several million dollars worth of collateral notes and that figuring the value.of the collateral at the present market price, there is an average deficiency in the collateral of about 6.7 percent. He states that these notes and collateral are held for the account of the Federal Reserve Agent of his Bank and that Federal Reserve notes are issued against them for the full amount of the notes. He asks whether in these circumstances his Bank should accept collateral from other Federal Reserve Banks at more than the market price. The Board has considered this question and desires that all Federal Reserve Banks be informed that they are expected in their discount transactions for other Federal Reserve Banks to require that all collateral notes discounted be fully secured, that is, that the market price of the collateral be equal to the face of the notes. The Board would suggest, however, that Federal Reserve Banks which hold collateral notes discounted for other Federal Reserve Banks give the borrowing banks a reasonable time, say until July 1st, to make good any deficiency in collateral. Very truly yours, Governor. To Chairmen of all F.R. Banks. ■ X-1972 Strictly Confidential MEMBER BANKS COLLATERAL NOTES SECURED BY GOVERNMENT TAR OBLIGATIONS. The Act approved September ~[t 1916, amended Section 13 of the Federal Reserve Act by adding thereto the following paragraph: "Any Federal Reserve Bank may make advances to its member banks on their promissory notes for a period not exceeding fif teen days at rates to be established by such Federal Reserve Bank, subject to the review and determination of the Federal Reserve Board, provided such promissory notes are secured by such notes, drafts, bills of exchange or bankers’ acceptances as are eligible for rediscount or for purchase by Federal re serve banks under the provisions of this Act or by the deposit or pledge of bonds or notes of the United States." This particular amendment was suggested to the Banking and Currency Committees of the Hous9 and Senate by the Federal Reserve Board in the Spring of 1916, at a time when little use had been made of the rediscount facilities of the Federal Re serve Banks. Experience had shown that quite a number of the larger member banks could use funds to advantage for a few days at a time and would be willing to secure accommodations from the Federal Reserve Banks for short periods, while they would have no occasion to use the funds for thirty, sixty or ninety day periods, and the banks as a rule were reluctant to offer for discount paper the maturity of which ran longer than the time for which funds were needed. It frequently happened c x- 1 9 7 2 “2that banks having occasion to use funds for a few days only would not have available paper of very short maturity in suf ficient volume to satisfy their requirements and in order that the Federal Reserve Banks might be in position to respond to the short time needs of member banks the Board suggested the m foregoing amendment. Before Congress had taken action, however, and as the summer advanced, it became more and more evident that the United States might be drawn into the Ttorld ^7ar, and in order to be in a position to facilitate Government financing in such an event the Board suggested that merrier banks1 fifteen day collateral notes might be secured also by the deposit or pledge of bonds or notes of the United States. Up to May, 1917.» member banks1 collateral notes discounted by Federal Reserve Banks were secured almost entirely by "notos, drafts, bills of exchange or bankers1 acceptances eligible for rediscount or purchase0, but since the issue of the first series of Treasury Certificates of Indebted ness and of the first Liberty Loan, member banks1 collateral notes have been secured almost entirely by bonds and notes of the United . States. . It seems, therefore, that it would be proper to divide member banks1 fifteen day collateral notes into two classes; (1), those secured by "notes, drafts, bills of exchange or bankers*, accept- x-1972 -3ances eligible for rediscount or purchase", and (2), those secured by "bonds and notes of the United States"* With re spect to the first class, it is evident that such notes are offered by member banks for the purpose of securing short time accommodations for the exact time the funds are needed* Where credit is required for a longer time a member bank would en dorse the "notes, drafts, bills of exchange or bankers’ accept ances" and rediscount them with the Federal Reserve Bank* Trans actions of this kind do not call for any concession in rate and such notes should properly take the rate established for rediscounts of longer maturities* As to class (2), however, the situation is different. Member banks have always been the purchasers and distributors of Treasury Certificates and they wore to a very large extent the purchasers and distributors of the various issues of the Government’s war bonds. Pending distribution it m s necessary for most of the member banks, and particularly those which subscribed for liberal amounts, to borrow from the Federal Re serve Banks and the fifteen day collateral notes secured by Treasury Certificates, Liberty Bonds and Victory Notes have always been used as a means of getting the needed accommodations from the Federal Reserve Banks, Paragraph (d) of Section lU authorizes the Federal Reserve Banks, subject to the review and determination of the Federal Reserve Beard to establish rates of discount "for each class of -1+- x -1972 papern and while the hanks may classify paper according to maturity or according to the character of security, they cannot draw any distinction between notes secured by the same class of collateral. Thus a Federal Reserve Bank may establish one rate of discount for member banks* collateral notes secured by commercial paper eligible for discount and another rate of discount on notes secured by bonds and notes of the United States, but it cannot establish two distinct rates of discount on notes secured by notes and bonds of the United States. Therefore while the purpose of Congress in permitting notes or bonds of the United States to be used as collateral to members banks* fifteen day notes was to facilitate the war financing of the Government, no consideration can be given in establishing discount rates for such paper to the circumstances attached to the ownership of notes and bonds of the United States by borrowing banks. It follows, there fore, that if a preferential rate of discount should be es tablished for notes of class (2), member banks could avail themselves of the opportunity thus afforded of securing an commercial accommodations at the lower rate, and/incentive would be given to the borrowing of bonds by member banks and there would be danger of an undue expansion of credit. But while a Federal Reserve Bank cannot establish dif ferential rates on paper of a given maturity having the x -1 9 7 2 -5- same security, it is not prohibited, by law from adopting the policy of receiving certain notes for discount and declining to consider application for discount of other notes* There fore it would seem in the present circumstances that a Federal Reserve Rank might properlydivide member banks 1 collateral notes into two classes as outlined above, and discount class (l), that is, notes secured by eligible commercial paper, at the current market rates for thirty day: paper, . and decline to receive for discount notes of claas (2), that is, notes secured by bonds and notes of the United States, unless the bonds end notes of the United States are actually owned by the borrowing bank and are directly con nected with the war financing of the Government- .As Treasury certificates are being issued to take care of the floating obli gations of the Government arising out of the war, and as the purchase of these certificates by the banks is an accommodation to the Government, member banks*promissory notes secured by such certificates, having not longer than fifteen days to run, should be taken freely and there can be no objection to a preferential rate on paper of this class. The Board's policy has been to ap prove the same rate on paper secured by Certificates of Indebt edness as the certificates themselves bear* This leaves to be considered member banks1 promissory notes • • I 9 x ■ X - 1972 - 6 secured "by the various issues of Liberty Bonds and Victory Notes* The Board has never approved any preferential rate on member banks1 collateral notes which were secured by bonded obligations of the United States other than bonds issued since April, 1917, but has taken the position consistently that the preferential ’rates given to notes of this class are for the accommodation of the Government in its war financing* In some districts there are many member banks which for patriotic reasons subscribed heavily to the Government war bond issues and some of them have not liquidated their holdings of such bonds to an extent which would relieve - them of the necessity of borrowing from the Federal Be serve Banks on them* There are cases also where member tanks have liquidated entirely their original subscriptions to Government bonds and have repurchased bonds for the sake of investment at the lower rates now prevailing in the market, or where member banks have borrowed bonds from their customers and have used them as collater al to fifteen day notes for the purpose of obtaining funds with which to make comnercial loans* There does not seem to be any reason why a Federal Reserve Bank should receive for discount member banks1 collateral notes which are secured by borrowed bonds or bonds bought purely for investment, and the inquiry is therefore made whether your Federal Reserve Bsnk would care to adopt the policy of declining to discount for member f ► x-1972 -7banks their fifteen day collateral notes when secured in this manner and announce that hereafter it will be its policy to confine such transactions only to offerings of notes which are secured by Liberty Eonds and Victory Notes, actually subscribed for in good faith by the borrowing bank before the allotment of the final issue of Government war bonds, that is, the Victory Notes. The Federal Reserve Banks should also require that all collateral pledged as security to member banks’ fifteen day notes have a market value at least equal to the face of the note. Therefore in discounting member banks* collateral notes secured by Liberty Bonds and Victory Notes actually subscribed for and rwned by the member bank, a Federal Reserve Bank should require, first, that such notes be secured by an amount of such bonds, the face value of which is equal to the amount of the note, and second, that the deficiency between the market value of such bonds and the face of the note be covered by the pledge of additional notes or bonds of the United States, or by the pledge of notes, drafts, bills of exchange or bankers acceptances eligible for discount or purchase by the Federal Reserve Banks. In consideration of all the attendant circumstances and in further consideration of the fact that by the limitations above outlined, it is clear that under use of Government war obligations as this plan there can be no # p x 1972 collateral to member barks1 fifteen day notes for the purpose of securing commercial accommodations at reduced rates, and therefore no additional inflation or expansion of credit, it would be proper for a Federal Reserve Bank to bear in mind the circumstances under which the bonds pledgpd with it are acquired and to make a liberal concession in the discount rate on such paper, that is, on member barks1 fifteen day promissory notes secured by Liberty Bonds and Victory Notes actually subscribed for and acquired from the Government by the borrowing bank, or taken before the final allotment of Victory Notes, from borrowing subscribers in default. In the Boards opinion, however, it would not be wise to make the rate on paper of this classification uniform with the rats borne by the bonds, for there should be no incentive to the borrowing banks to hold bonds as a basis of collateral to loans indefinitely. It has been suggested that where the notes are secured by Victory Notes which bear 4-3/4$ interest that the rate of discount be 5 $ and where notes are secured by Liberty Bonds bearing 4-1/4$ interest that the rate of discount bo* 4-1/2$. It is further suggested that a Federal Reserve Bank, if it should adopt the foregoing policy and schedule of rates, should inform its member banks that they will be expected in view of the favorable rate accorded them to make a reasonable reduction in the amount of such notes at the end of each fifteen day period. The member barks could well afford to make this reduction equal at least to the amount of interest saved. X 197? It is clearly impracticable to give any preferential rate to customers* notes which are secured by Liberty Bonds. This would open up avenues for too large an extension of credit when the large volume of Liberty Bonds outstanding is considered,. A Federal Reserve Bank, therefore, should continue to discount for member banks customers* notes secured by Liberty Bonds and Victory Notes at the established commercial rate. Such customers* notes, however, ought not to be used as collateral to member banks* fifteenday notes of class (2). July 3, 1920. / F o rp iV o » ..13 1 3r f e S Office Correspondence To____ Mr, Hamlin From ._____ Mr. WyatttGeneral Counsel. jjjyuk FEDERAL RESERVE BOARD Date___ Dec, 22,1931* Subject: Rediscount of paper secured byi-bonds of War Finance Corporation, Dear Mr, Hamlins Confirming our conversation on the above subject, I find that the original War Finance' Corporation Act of April 5, 1918, 40 Statutes at Large, 506,510, containedthe following provision on the above subject: "Sec. 13. That the Federal reserve banks shall be author ized, subject to the maturity limitations of the Federal reserve Act and to regulations of the Federal Reserve 'Board, to discount the direct obligations of member banks secured by such bonds cf the Corporation and to rediscount eligible paper secured by such bonds and indorsed by a member bank. Ho discount or rediscount under this section shall be granted at a less interest charge than one per centum per annum above the prevailirre rates for eligible commercial paper of cor responding maturity. "Any Federal reserve bank may, with the approval of the Federal Reserve Board, use any obligation or paper so acquired for any purpose for which it is authorized to use obligations or paper secured by bonds or notes of the United States not bearing the circulation privilege: Provided, however, That whenever Federal reserve notes are issued against the se curity of such obligations or paper the Federal Reserve Board may make a special interest charge on such notes, which, in the discretion of the Federal Reserve Board, need not be ap plicable to other Federal reserve notes which may from time to time be issued and outstanding. All provisions of law, not inconsistent herewith, in respect to the acquisition by any Federal reserve bank of obligations or paper secured by such bonds or notes of the United States, and in respect to Feder al reserve notes issued against the security of such obliga tions or paper, shall extend, in so far as applicable, to the acquisition of obligations or paper secured by the bonds of the Corporation and to the Federal reserve notes issued against the security of such obligations or paper," VOLUME 221 PAGE 85 / h # Memorandum-Mr. Hamlin- 2 The Act of August 24, 1921, 42 Statutes at Large, 181, 184, amend ed and reenacted the first paragraph of Section 13 of the original Wax Finance Corporation Act to read as follows: "Sec. 6, Paragraph 1 of section 13 of Title I of the War Finance Corporation Act is hereby amended and reenacted to read as follows: "‘That the Federal Reserve Banks shall be authorized, subject to the maturity limitations of the Federal Reserve Act and to regulations of the Federal Reserve Board, to discount the direct obligations of member banks secured by such notes or bonds of the Corporation and to rediscount notes or other negotiable instruments secured by such notes or bonds and indorsed by a member bank. Discounts or redis counts under this section shall be at an interest rate equal to the prevailing rate for eligible commercial paper of corresponding maturities.11 / i BR0AD3JIR3 OF BLIGI3ILITY, Abstract of Replies to Questionnaire sent out by Senat e Committee in December, 1930. With a few exceptions, Federal reserve banks did not favor changing the provisions of the Federal Reserve Act relative to paper eligible for discount, or the rulings or the regulations of the Federal Reserve Board, interpretive of these provisions. Federal Reserve Bank of Chicago: (a) That the maturity date on otherwise eligible paper be extended from 90 days to 6 months. Rediscounts of such paper should bear a higher rediscount rate than that prevailing on 90-day paper. Above should be allowed only under conditions and circumstances to be established by the regulations of the Federal Reserve Board. (b) Permitting Federal reserve banks to loan member banks, not exceeding 90 days,. on notes secured by bonds which are now acceptable by the Treasury Department as security for war loan deposits. Such advances to be granted at penalty rates, and not to serve as the basis of the issuance of Federal reserve notes. Federal Reserve Eank of Dallas: (a) That landlords1 obligations be made eligible for rediscount. (b) That the statutory limit be increased from 15 to 90 days for advances to member banks secured by notes, drafts, bills of exchange, or bankers acceptances eligible for discount and purchase* i W f ? 221 2 Federal Reserve Bank of Philadelphia; (a) Suggested that in some instances it might he advisable to grant permission to advance funds to individual banks in distress, against any of their assets. The obligations taken should not be used as security for Federal reserve notes. Federal Reserve Bank of Richmond: (a) Federal reserve banks to be peimitted to make advances,secured by high grade bonds,to banks lacking eligible paper. Not to serve as security for Federal reserve notes. The existence of the emergency should be determined by the Federal Reserve Board* Governors1 Conference. April 19. 1931* It was voted (Governors Calkins, Martin and Talley voting in the negative) as follows: (a) To broaden eligibility of collateral on member bank collateral notes, by admitting deposits of Federal Intermediate Credit Banks having a maturity of not more than 6 months. (b) In cases of emergency, to permit advances to be made secured by other assets, subject to the discretion of the Board of Directors of the Federal reserve bank and the restrictions, limitations, and regulations imposed by the Federal Reserve Board. (c) Such memberbank notes should have a maturity of not more than 90 days, when secured oy notes, drafts, bills, or bankers acceptances now eligible for rediscount or purchase by Federal reserve banks. (d) Such notes when secured in whole or in part by any other collateral, should have a maturity of not more than 15 days* Federal Advisory Council* Mvised Board to consider advisability of permitting Federal reserve banks in ifcimes of pressure, to accept from member banks bills payable on securities not now eligible, the Federal Reserve Board to issue regulations defining the conditions under which such action may be taken* L* ru,A. C O N F ID E N T IA L S E C R E T A R Y ’S G O V E R N O R S DECEMBER m in u t e s C O N F E R E N C E 1 AND W A S H IN G T O N , 2, 1931. D. C. INDEX TO SECRETARY1S MINUTES GOVERNORS' CONFERENCE December 1 and 2 , 1931. Paragraph in Secretary's Minutes 3 Adjustment of system investments- - - - - - - - - - - - Arrangement to notify F. R. banks and branches of closing, reopening or succession of banks - - * - - - - - 2 2 Bailey, Retirement of Governor -- - - - - - - __ - - - 2 4 Banking situation and bank failures - - - - - - - - - - Budget, How can we balance our q - ^2 - - - - - - - - - - - - Chairman, Election of --------------------------------- x Closed banks, Arrangement to notify F« R. banks and branches of reopening or succession of — — — — — — — — 22 Committee reports: Bank •o 1 reserves - - - - - - - - - - - - - - - — Bankers acceptances, Subcommittee of general committee on - - - - - - - - - - - - - - - - - - - - ^ Collections, Standing committee on - - - - - - - - - Group, Branch, and Chain banking -------------------Insurance -- - - - - - - - - - - - - - - - - - - - - - 1 Leased wire Pension - -- - - - - - - - - - - - - - - __ - - - - - ID | „ 17 3 20 21 22 23* * 3 ^3 ^9 Cooperation of F. R, banks with Intermediate Credit banks ---Cost of safekeeping function at F. R, b anks____________ 14 Credit transactions and p o l i c i e s ---------------------- 2, 3, 4 5 6 7, 8 , 9, 10 Discount rates and open market operations - - - - - - - - 2 Election of Chairman and Secretary 1 _ ______ ___ __ Examiners, Policies of bank --------------------------- _ 8 Federal Advisory Council, Suggestion re Intermediate Credit Bank debentures - - - - - - - - - - - - Foreign exchanges and the gold standard 5 z Paragraph in Secretary's Minutes Gold: Review of recent movements - - - - - - - - - - - - Future policy here and abroad ------ -----------Government checks and warrants - - - - - - - - - - - Governor Bailey, Retirement of ---------------------Inquiries involving matters of system policy or interest Insurance Committee, Report of - - - - - - - - - - - Insurance policy carried by F» R* banks to cover se curities held in safekeeping for member banks — — — Intermediate Credit Bank debentures Investments, Adjustment of system 13 - - - - - - - - - - - - - - - - - - Leased Wire Committee, Report o f - - - - - - - - - - Legislation to limit investment in building and fixtures by member b a n k s __ __________ ___ _ Municipal finance - - - - - - 11 - 6 Municipal warrants - - - - - - - - - - - - - - - - - National Credit Corporation - - - - - - - - - - - - - Open market operations, Report of - - - - - - - - - - - Z Pension Committee, Report o f - - - ____ - 19 Policies of bank examiners - - - - - - - - - - - - - - 8 Real Estate Mortgage Discount Corporation, Proposed - - 7 Relations with foreign banks - - - - - - - - - - - - - - 5 Reports of committees on: Bank reserves - - - - - - Bankers acceptances, Subcommittee of general — — - — Collections, Standing committee on Group, Branch, and Chain banking -------- -------Insurance - - - - - - - - - - - _ _ _ _ _ _ _ _ _ Leased wire Pension - - - - 16, 17 - 18 - 20, 21, - 23 - 18 - 18 - 19 ________ ZZ 3 Paragraph in Secretary's Minutes Report of open market operations .............. 2 Reserves, Committee on Bank ____ ____ 16, 17 ' ^ e r a l i o n s T 3: I ^ ^ ^ e r and year-end Secretary, Election of ............ Securities, Safekeeping 0f, for member b M k s ______ Standing Committee on Collections. Report of ______ Acceptances, ^eport^of °n_B“ kers ------- 18 CONFIDENTIAL P R 0 G R A M G O V E R N O R S C O N F E R E N C E Deccaber 1 and 2, 1931 Washington, D. C. I. II. ELECTION OF CHAIRMAN AND SECRETARY FOR YEAR 1932 CREDIT TRANSACTIONS AND POLICIES A. B. C. D. S. Discount rates and open market operations. 1. Report of Open Market Policy Confer ence. 2. Seasonal program covering December and year-end operations. 3. Adjustment of system investments in Government securities in times of emergency. Gold• 1. Review of recent movements. 2. Future policy here and abroad. Relations with foreign banks. 1. Report of foreign operations of system. 2. Foreign exchanges and the gold standard. The banking situation and bank failures. 1. National Credit Corporation. 2. Proposed Real Estate Mortgage Dis count Corporation. 3. Policies of bank examiners. 4. Recommendation to the Federal Reserve Board that at an appropriate time legislation be sought limiting the proportion of capital and surplus which a National bank may invest in building and fixtures, either by statutory designation or by re quiring the approval of the Comp troller of such investment. Intermediate Credit Banks. 1. Cooperation of Federal Reserve Banks. New York Now York New York Richmond New York New York New York New York New York New York New York Philadelphia New York 2 F. # III. Municipal finance. 1. Increased burden on municipal budgets due to unemployment. 2. Purchase of municipal warrants by Federal reserve banks. New York New York OPERATION AND ADMINISTRATION A. How can we balance our budget. B. Safekeeping of securities for member banks. • 1* The advisability of securing from all member banks depositing se curities with Federal Reserve banks for safekeeping an agree ment whereby the depositing bank would agree to approve and accept the insurance policy carried by the Federal reserve bank, and all liability other than that covered in the Federal reserve bank's policy would be assumed by the de positing bank, which, if it de sired, could itself carry insurance against such additional liability. 2. Cost of the safekeeping function at Federal reserve banks. Kansas City F. R. Board F. R. Board (See Federal Reserve Board's letters X-6940 and X-6940-a dated August 11, 1931.) C. IV. Inquiries involving matters of system pol icy or interest. (See Federal Reserve Board's letter X-7030 dated November 23, 1931.) COLLECTIONS AND CLEARINGS A. Report of Standing Committee on Collections F. R. Board REPORTS OF COMHITTEES A. Committee on Bank Reserves. B. Insurance Committee. C. Leased Wire Committee. D. Pension Committee. E. Sub-committee of General Committee on Bankers Acceptances. SUPPLEMENTARY TOPIC .1 ' Report of Committee on ^roup, branchi and chain banking. GOVERNORS CONFERENCE December 1 and 2, 1931. Washington, D. C. First Day?s Session. Tuesday. December 1. Morning The meeting was called to order at 10:30 a. m. Present: Governor Calkins, Chairman, and Governors Young, Harrison, Norris, Fancher, Seay, Black, McDougal, Martin, Geery, Bailey, and McKinney, Mr* Strater, Secretary. TOPIC I . VOTED ELECTION OF CHAIRMAN AND SECRETARY FOR THE YEAR 1932* (l) that Governor Calkins be re-appointed Chairman, and Mr. Strater re-appointed Secretary for the calendar year 1932. TOPIC II. CREDIT TRANSACTIONS AND POLICIES A. Discount rates and open market Operations. 2l1___ Report of open market opera tions* En ___ Seasonal program covering December and year-end oper ations. (z ) Governor Harrison, Chairman of the Open Market Policy Con ference, furnished to each of the Governors a report of open market operations for System Account, showing changes in the holdings of Gov ernment securities and bills, and the changes in the participations of the individual Reserve banks. There was a general discussion of discount rates in relation to, and as they might be affected by, open market operations. z TOpI-C II. CREDIT TRANSACTIONS AND POLICIES. iLr__ Adjustment of system investments in Government securities in time^ of emergency. (3 ) Governor Seay outlined his views regarding the necessity 6 for some provision being made for any Reserve bank which finds it necessary to dispose of its participations in Government securities held for System Account, particularly in the event that its propor tion could not be absorbed by the other participating banks. It was the sense of the conference, as previously recom mended by the Executive Committee of the Open Market Policy Conference, that in any case where a Federal Reserve bank needs to adjust its posi tion on account of its reserve ratio, it should offer for participation among other Federal Reserve banks some of its holdings of Bankers' acceptances, and that in any case where a Federal Reserve bank needs to adjust its free gold position, which would not be aided by a sale of Bankers' acceptances, it should offer for participation to the other Federal Reserve banks some of its holdings of Government securities. If in the latter case such necessary offerings of Government secur ities are not accepted by other Federal Reserve banks, then it is clearly within the authority of the Reserve bank needing accommoda tion to sell such Government securities in the open market. It was generally understood, however, that no Federal Reserve bank, so long as it 13 a member of the Open Market Policy Conference, should sell its holdings of Government securities in the market as a matter of credit policy contrary to the approved policy of the Open Market Policy Conference. The right to buy or sell securities in the mar ket as an emergency was generally agreed to by all the Governors present. 3 TOPIC II. CREDIT TRANSACTIONS AND POLICIES B. Gold. 1, Review of recent movements. Z . __ Future policy here and, abroad. (4 ) Governor Harrison discussed the recent unprecedented with drawal of gold from the United States by foreign countries, and the factors which entered into the apparent halting of these withdrawals which had continued for a period of five or six weeks, ending at the close of October. TOPIC II. CREDIT TRANSACTIONS AND POLICIES C. Relations with foreign banks. 1 , _Report of foreign operations of the system* 2. _Foreign exchanges and the gold standard. (5) Governor Harrison discussed the various matters relating to the operations of the system with foreign central banks, also the status of principal foreign countries with respect to the gold standard, and furnished each of the Governors with a memorandum entitled "The Credit Crisis of 1931," giving in detail a history of the crises in various foreign countries and the events leading up to the abandon ment or suspension of the gold standard in many of them. (6) TOPIC II. 'CREDIT TRANSACTIONS AND POLICIES D. The hanking situation and bank failures^ 1_!___National Credit Corporation. There was a general discussion of the activities of the corporation, and the present status of its operations. TOPIC II. CREDIT TRANSACTIONS AND POLICIES (7) p» The banking situation and bank failures,. ___Proposed Real Estate Mortgage Disj count Corporation. There was a general discussion of the effect of such a cor poration on the commercial banking situation. It was generally the 4 opinion that the proposed lim itations would make the corporation of relatively l i t t l e direct benefit to commercial banks of the country. TOPIC II. CREDIT TRANSACTIONS AND POLICIES (8) D» The banking situation and bank failures. 3. Policies of bank examiners. There was a general discussion of this topic* and it was the consensus of opinion that it is very important that the supervisory au thorities exercise the greatest care and their best judgment to the end that no possibility of keeping solvent banks in operation is overlooked. TOPIC II. CREDIT TRANSACTIONS AND POLICIES (9) D. The banking situation and bank failures. 4. Recommendation to the Federal Re serve Board that at an appropri ate time legislation be sought limiting the proportion of capi tal and surplus which a National bank may invest in building and fixturest either by statutory designation or by requiring the approval of the Comptroller of such investment. After a general discussion, it was VOTED that in connection with recent bank troubles, the Governors have been impressed by the excessive proportion of the capital structures invested, in many cases, in banking quarters. The conference therefore suggests to the Federal Reserve Board the advisability of con sidering legislation which will secure some effective check upon invest ments of this kind, by member brinks. -TQpic.IL. CREDIT TRANSACTIONS AND POLICIES E.„ Intermediate Credit Banks. L t ___Cooperation of Federal Reserve Banks. The suggestion with respect to Intermediate Credit Bank (io) 5 debentures made by the Federal Advisory Council to the Federal Reserve Board at its meeting on November 16 was read, and it was VOTED that it is the sense of the conference that it con curs in the recommendation of the Advisory council with respect to In termediate Credit Bank debentures, and approves the council’s sugges tion that the Federal Reserve Board consider the possibility of rec ommending to Congress that debentures issued by Intermediate Credit Banks be made eligible as security far promissory notes discounted by member banks with Federal Reserve banks. The conference believes, however, that such debentures should have a maturity of not exceeding six months. TOPIC II. CREDIT TRANSACTIONS AND POLICIES F. Municipal finance. 1» Increased burden on municipal budgets due to unemployment. 2. Purchase of municipal warrants by Federal Reserve banks. (ll) It was the consensus of opinion that member banks should be aided by the Federal Reserve banks, when necessary, by the purchase of eligible municipal warrants. Municipal warrants of the character defined in the Regulations of the Federal Reserve Board might appro priately be purchased on a fifteen (15) day resale agreement at a rate to be determined by the purchasing Federal Reserve bank. At 12:50 p.m. the conference adjourned to reconvene at 2:30 p* m. First Day’s Session. Tuesday. December 1. Afternoon The meeting was called to order at 2:35 p. m. 6 Same attendance as at the morning session. 1 0 £I2 _IILi (\ ) o p e r a t i on a n d a d m i n i s t r a t i o n A. z Hov/ can we balance our budget? There was a general discussion as to the attitude of the several Governors regarding salary reductions, omission of dividends, and the suspension of free services to member banks. In this connec tion ,• it was pointed out that in all districts salary scales are al ready at best only equal to, and in many cases lower than, salaries paid by commercial institutions for comparable work. In view of that fact, and the further fact that the reserve banks do not provide bonus es, or give other advantages such as obtain at commercial institutions, especially during more prosperous periods, it would be unjust and dis organizing to reduce salaries in periods of depression. It was the sense of the conference that, although it now appears that the gross earnings of the Federal Reserve banks will not be sufficient to provide for expenses, reserves, and dividends for the current year, it would be unwise at this time to omit the dividend on capital stock, to make any flat reductions in salaries, or to curtail free services to member banks, and that the resulting deficit should be charged to accumulated surplus. It was understood, however, that the reserve banks will continue to closely check expenses in order to keep them as low as possible without impairing operating efficiency, or the morale of the personnel. TOPIC III. OPERATION AND ADMINISTRATION (1 3 ) JLi___.Safekeeping of securities for member banks. 1* The advisability of securing from all member banks deposit ing securities with Federal Reserve banks for safekeeping. 7 an agreement whereby the de positing; bank would. agree to approve and accept the insur ance policy carried by the Federal Reserve bank, and all liability other than that cov ered in the Federal Reserve bank’s policy would be assumed by the depositing bank, which) if it desired, could itself carry insurance against such additional liability. The report of the Insurance Committee dealing with the sub ject was read and after a general discussion, it was VOTED that it is the sense of the conference that there be no change in the method of handling safekeeping securities for the rea sons given by the Insurance Committee in its report. It was thought, however, that insurance coverage should apply first to losses sustain ed by the Federal Reserve bank, and second to losses sustained by the depositing member bank. It was also informally understood that the Insurance Com mittee should consider the advisability of trying to arrange to have a rider attached to insurance policies to that effect. TOPIC III. OPERATION AND ADMINISTRATION (14) B» Safekeeping of securities for member banks. Z. Cost Of the safekeeping function at Federal Reserve banks. No action was taken on this topic. TOPIC III. OPERATION AND ADMINISTRATION C. Inquiries involving matters of sys tem policy or interest. (15) After discussion, it was VOTED that it is the sense of the conference that the Fed eral Reserve banks should continue, as in the past, to refer matters of system policy or interest to the Federal Reserve Board before reply ing to circular inquiries on such questions* TOPIC V. REPORTS OF COMMITTEES A. Committee on Bank Reserves* (16) At the invitation of the Conference, Governor Meyer and Messrs* Hamlin, James, McGhee, and Miller of the Federal Reserve Board, together with Messrs. Harrison, Morrill and Wyatt, and Messrs. Smead, Goldenweiser and Riefler here entered the meeting and joined in the discussion which followed. At 6:00 p. m. the conference adjourned to reconvene at 10:00 a. m. on Wednesday, December 2. Second Day*s Session - Wednesday* December 2, 1931. Morning Meeting was called to order at 10:20 a. m. Same attendance as at the preceding session. TOPIC V* REPORTS OF COMMITTEES A. Committee on Bank Reserves. (17) The discussion of the report of the Committee on Bank Reserves begun at the previous session was concluded, and it was VOTED that the conference expresses its appreciation of the work done by the Committee on Bank Reserves in preparing a very comprehensive report, but feels that further study of the report should be made by each bank pending the next conference, at which time it will be fully considered and a recommendation made to the Federal Reserve Board. - 9 - TOPIC V. REPORTS OF COMMITTEES (18) B# Insurance Committee. C. Leased Wire Committee# E.__Sub-committee of General Committee on Bankers* Acceptances. The committee reports were read, and it was 0 VOTED that they be accepted and placed on file, TOPIC V. REPORTS OF C0*21ITTEES D« Pension Committee. (19) The Pension Committee's report was read and, after a general discussion, it was VOTED that the report be accepted and action postponed pending a further effort to obtain a Federal charter through the in troduction of a Bill in Congress. TOPIC IV. COLLECTIONS AND CLEARINGS A. Report of Standing Committee on Collections. (20) The Secretary outlined briefly the committee's recommenda tions on the topics submitted to it for consideration by the Conference of Governors of April 27 - 29, 1931. 1. (21 ) Desirability of definition by the Treasury Department of the rights, duties, and responsi bilities of Federal Reserve banks in cashing Government checks and warrants. It was VOTED to refer this matter to the Conference of Counsel for Federal Reserve banks for consideration and consultation with the Stand ing Committee on Collections and officials of the Treasury Department, with a view to obtaining a clarification of the applicable provisions of Treasury Department Circular No# 176, with respect to the duties and responsibilities of the Federal Reserve banks in cashing Government - 10 checks and warrants. (22) £. Uniform arrangement to notify all Federal Reserve banks and branches of reopening or suc cession of hanks previously closed. After discussion, it was VOTED that each Federal Reserve bank report to all other Federal Reserve banks by wire daily the closing, reopening or succes sion of all banks in their district so far as they have such information. With respect to the other topics covered by the committee*s report, it was VOTED that the report be accepted and filed. SUPPLEMENTARY TOPIC. REPORT OF THE COMMITTEE ON GROUP, (23) BRANCH, AND CHAIN BANKING At the invitation of the conference, Doctor Goldenweiser submitted a brief oral report of progress, and provided each of the Governors with a copy of the material accumulated by the committee. The following resolution was unanimously adopted: It The conference has heard with great regret the announcement from Governor Bailey that it is his purpose to retire from the Governorship of the Federal Reserve Bank of Kansas City at the end of the year, and we all tender him aur most sincere good wishes for many more years of health, usefulness, prosperity, and happiness.’1 At 1:00 p. m. the conference adjourned. H. F. STRATER Secretary (24)
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