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205.001 - Hamlin Charles S Scrap Book - Volume 225 FRBoard Members Box r Folder t (x. \J ,, uz CO “f MMfl I BOARD OF GOVERNORS OF THE FED ER A L RESERVE SYSTEM Office Correspondence To________ The F ile s________________________ From____ Mr~ Co.e______________________ Date___ August 6 , 19^,1 Subject:. _______ A fter correspondence with Mrs. Hamlin (see le t t e r s of May25 and June l+f 1941) the items attached hereto and lis t e d below, because of th eir possible con fid en tial character, were taken from Volume 225 of Mr. Hamlin’ s scrap book and placed in the Board's f i l e s : VOLUME 225 Page 11 Memo to Mr. Hamlin from Mr. Goldenweiser re "The Movement of Commodity and Common Stock P r ic e s ". Page 39 Preliminary Memo fo r the Open Market P olicy Conference, February 24, 1932. Page 5? Memo to Board from Page 61 Memo to Mr. Hamlin Page 71 Memo to Mr. Hamlin in "fr e e gold" Mr. Sinead re Bank Suspensions during 1931. from Mr. Wyatt re H.R. 10241. from Mr. Smead re Estimated possible increase under the G lass-S teag all B i l l . Page 73 Letter from Mr. Hamlin to Hon. Chas. Warren re French debt. Page 87 ex-7115) Advances to member banks under Sections 10(a) and 10(b) of the F .R .A ct, as amended February 2 7 , 1932. Page 109 Memo to Mr, Hamlin from Mr. Smead re Changes in Reserve Bank c re d it, production index, and member bank loan s, during selected periods. Page 111 ^ Letter to Mr. P la tt from Mr. Hamlin re Federal Reserve notes and attached memo to Mr. Hamlin from Mr. Smead. Page 113 Memo to Mr. Hamlin from Mr. Smead re Federal Reserve n otes. Page 119 kemo to Mr. M orrill from Mr. Smead re Steagall B i l l , H.R. 10241. Page 121 Memo to Mr. Hamlin from Mr. Wyatt re Provisions o f the Steagall B i l l (H.R. 10241) re par clearance and immediate c r e d it. Page 128 Memo to Mr. Hamlin from Mr. Smead re c la s s ific a tio n of bankers ac ceptances held by F.R. Banks. Page 129 Memo to Mr. Hamlin from Mr. Goldenweiser re price movements with changes in money in circu lation and in Reserve Bank cre d it. Page 149 Memo to Mr. Hamlin from Mr. Van Fossen re average amount of Reserve Bank c r e d it. In compliance with your request of February 27, we have pre pared the accompanying chart showing the movement of the wholesale price index of the Bureau of Labor S t a tis tic s and of the common stock price index of the Standard S t a tis tic s Company. The chart shows clea rly the comparative steadiness of the commodity price le v e l during the years of the stock market boom. VOLUME 225 PAGE 11 NO CONFIDENTIAL February 2 3 , 1932 ’ PRELIMINARY MEMORANDUM FOR THE OPEN MARKET POLICY CONFERENCE, FEBRUARY 2k. 19^2 1 At the la s t meeting of the Conference on January 11 and 12, the f o l lowing program of action either by the Federal Reserve System or by others was considered as a means fo r dealing with the serious situ ation e x istin g in the banking and credit situ ation as evidenced by the heavy bank fa ilu r e s increasing currency hoarding, and a continued rapid d efla tion of c r e d it. (1 ) Passage of the Reconstruction Finance Corporation B i ll (2 ) Organized support of the bond market predi cated upon railroad wage cuts (3 ) Federal reserve and member bank cooperation with the Treasury program (*0 Federal reserve b i l l purchases when possible (5 ) Reduction in discount rates (6) Buying of G-overnment se cu ritie s i f necessary, f a c ilit a t e d by a lle v ia tio n of free gold position The f i r s t two of these proposals which were dependent upon action by others have been carried through. The third was at le a st p a r t ia lly car ried through to the extent that the issue of $350,000,000 Treasury c e r t i f i - < cates on January 2 5 was well taken a fte r the reserve banks had discussed the matter with the member banks to secure their cooperation. In fa c t , the issue has sold at a slig h t premium since that time; For one reason or another points yet been a c tiv e ly pursued. k, 5 , and 6 of the program have not Continued uncertainties in the domestic situa tio n , as well as a large drain of gold to Europe and p a rticu la rly to France, stimulated by fear of in fla tio n in th is country, have been important facto rs VOLUME 225 PAGE 39 2. in making it seem undesirable to carry through an aggressive program of re duction in discount rates and purchases of Government se c u r itie s . The re la tiv e ly small amount of free gold held by the reserve system was a further major facto r in lim itin g the p o s s ib ilit ie s of purchases of Government secur itie s . P artly as a consequence of steps which have been taken, p a rticu la rly the organization of the Reconstruction Finance Corporation, the number of bank fa ilu r e s has been reduced and in the past two weeks the hoarding of cur rency has begun to show some slackening, though there has not been as yet any substantial return of currency. The d efla tion of bank cre d it, however, continues at a vigorous pace and shows, in fa c t, no slackening from the rate of decrease of the la st quarter of 1931. Loans and investments of reporting member banks have declined by $ 800,000,000 in the f i r s t per year. 7 weeks of th is year, or at the rate of 2 9 per cent Under th is steady d eflation of credit business has shown no evi dence of recovery but has continued to decline at le a st u n til the past two weeks. A major cause fo r th is continued credit d e fla tio n has been the heavy borrowing by member banks, p a rticu la rly outside of a few principal centers. Many member banks are so heavily in debt that th eir energies are constantly devoted to an e ffo r t to liq u id a te credit and thus repay th eir indebtedness. The most recent figures show that the discounts of member banks ape about $ 8 5 0 ,0 0 0 ,0 0 0 , and that the weight of these discounts is f a llin g most heavily on banks outside the principal centers. In f a c t , the discounts of these groups of banks are considerably larger than they were in I 929 when the re serve system was exerting the maximum of pressure fo r d e fla tio n . The present amount of member bank borrowing has always proved d eflation ary, except perhaps « ' « • - • 3. during the war, and with the present sen sitive psychology, an interruption to d efla tion seems u n lik ely as long as the weight of discounts is as heavy as at present. A steady drain of gold through exports, which may he expected to continue, has the constant tendency to increase these discounts. The apparent imminence of the passage of the new Glass B i l l removes cer ta in of the restra in ts upon member hank and Federal reserve action . In the f i r s t place the emergency discounting provisions should resu lt in le ss con cern by the member banks as to their liq u id ity and greater w illingness to employ their funds fr e e ly . In the second place the provision of the G-lass B i l l re la tin g to c o lla te r a l fo r Federal reserve notes makes i t possible by action of the Federal Reserve Board to increase the System’ s free gold from $*450,0 0 0 ,0 0 0 to $ 1 , 2 0 0 , 0 0 0 , 0 0 0 , and so remove any legal restraint upon what ever purchase of Government se cu ritie s may appear desirable to o ffse t gold exports or to decrease the pressure of rediscounts. Under the new provision the amount of free gold is not affe cte d by purchases of Government se cu ritie s 9 unless or u n til these purchases bring about an increase in the to ta l of Fed eral reserve c r e d it. Furthermore, the Glass B ill has been important in re viving a general s p ir it of hopefulness and in some measure d isp e llin g fe a r . I t has started a movement which, i f continued and supported, might prove the beginning of recovery. R«»erM ***'*■ addiu York «*.; ■/ MILLIONS OF DOLLARS ILLIONS OF DOLLARS 800 BILLIONS OF DOLLARS MONETARY GOLD STOCK \ \ BORROWINGS ATFR.BANKS l* y\\ ; ! \,-A V i J [ i s *JvA LOANS&INN/ESTN/ENTS V j ) _L-...1_L_—L—J_ _L_LL 9Li—i —_1 J F M AM N D J F M 1931 . 1932 Monetary Gold Stock of the United States| (Weekly averages of d a ily figures) J J A S l. 0 Loans and Investments and Indebtedness of Weekly Reporting Member Banks NUMBER OF SUSPENSIONS -,200 MILLIONSOFDOLLARS 6000"-- 5800 5600 S000 CURRENCY IN CIRCULATION (SEASONALCHANGEELIMINATED) 4800 4400 BANK SUSPENSIONS 4000 Changes in Currency Circulation (Seasonal Variations Eliminated) Compared with Number, of Bank Suspensions ' ?■ ■ ME. EMU'S March 5 , 1932 Federal Reserve Board * Bank Suspensions during 1931 Mr. Smead manraraidi Our records of bank suspensions for the year 1931 ham now been complete* ly reconciled with the Federal reserve agents, and final figures, by districts, states, and classes of banks, were published in the Febzuary issue of the Fed eral Reserve Bulletin (pages 132 and 13b). ▲ total of 2 ,29« banks (and approximately 2 b2 branches) suspended during the year with aggregate deposits of $1 ,691 ,000,000, as 001153ared with 1 ,3^5 banks in 1930 with deposits of $*6b, 7 15 ,000 , and 956 in 1926 with deposits of $272 ,^88 ,000 , the previous peak years for bank suspensions. During the year, 276 suspended banks with deposits of $15*,1*7,000 resumed operations. The following tat le shows the number, capital, and deposits of suspended and re opened banks, by years, since 19 2 1 : (Capital and deposits la thousands of dollars) Tear 1921 1922 1923 1929 1925 1926 1927 192S 1929 1930 1931 Total Banka m i ________ Banks reonened ItaBter .Capital— 1Deposits_ Humber Capital penosltf 501 351* 6 b* 776 612 956 662 U91 692 1.3 * 5 2,298 9.2 8 5 VOLUME 225 PAGE 55 22,802 13.7*3 21.9*3 S ft ,80* *.763 19.715 32.25* 111,6*3 32 2 20*,120 5*0,586 196.*60 110.721 188,701 213.338 172,900 60 65 37 9b 62 1 .9 1 s *,003 1.516 2.8 1 5 1.9 9 * 17. *93 35.565 11,67* 22,*62 272.*88 193.891 138,6*2 23*.532 86*.715 1.691,510 *.277.898 lb9 95 39 5* lb7 276 1 ,0*2 5.13* 3 .9 0 6 1.5 0 * 3,0 5 2 6,802 60.6IO 35.729 15.727 25.829 61.599 19,102 158,187 *61,*93 51.7*6 16,618 F e d e ra l R e se rv e B o ard - #2 More than half the hank suspension* In 1931 took plaoe in the last four aonths of the year — 305 In September, 522 in October, 175 in November and 35S in December. Monthly figure* of bank suspensions for the last two years are given below: Number of mspefialona i m Month m January February March 202 99 7 6 .5 5 3 86 7^ 3^.616 34.320 6k 91 96 55 167 66 41,683 43.493 190,480 40.745 180,088 833.505 77 April May June Deposits of suspended banks -- ilM thousands of dollars^ 1933,. I 19*) July August September 93 65 158 67 305 66 October November December 522 72 175 35* 25 U 3 28.903 32 .8 0 0 23.769 33.388 1 9 .3 1 5 70 ,5 6 6 3 2 .3 3 3 21.951 83.6 66 *•599 6 7.6 5 6 18 6 ,30 6 277.051 367.119 fhe ratio of bank suspensions in 1931 to all banks in operation on June 3 0 , 1931 was 10 .H per cent, compared with 5*6 per cent for 1930 and an approxi mate yearly average of 2 .2 per cent for the 9 -year period I92 I-I929 . fhe ratio of deposits of suspended banks to deposits of activs banks, as shown by the following table, was 3 JO per cent as compared with 1 ,5 per cent in 1930 and an n vsrage of only O .k per cent for the 9-year period 1921-1929: Tear Ratio of number of Ratio of deposits bank suspensions 1 of suspended banks to total number of to deposits of all banks in operation banks in enerstlAn 1931 1930 1921-1929 average 1 0 .H# 5 .6 2 .2 3 .0 * 1*5 .H Federal Reserve Board - #3 The average size of banks that suspended In 193* *** larger than in any of the previous 10 years. As brought out in the following table, oent of the honk* that suspended in 193* more, coopered with I 5.S per cent in 23.7 per h a d a capital stock of 3100,000 or 1930 and 9-7 P«r cent during the period 19^1.1929: Banks with a capital , of - $100,000 and over $50,000 and over $25,000 and over Per cent of total number of bank suspensions___________ 1 1930 1 1921-1929_____ 1931 15.8 23.7 1*3.6 75-5 9-7 32.2 2 7 .2 64.6 59-0 The increase in the average site of the banks that suspended in 193* *• reflected also in the increased number of suspensions in the larger towns and cities. As shown in the table below, 13.7 P«r cent of the suspensions daring 19 3 1 were in cities with a population of 25,000 or more, as compared with 9*2 per cent in 1930 and 5*2 I** cent in the 9-P«*r period 1921-1929: Banks located in places with population of J 25.000 and over 10.000 and over 5.000 and over 1.000 and over frtft* *-QQQ----- -— Per cent of total number of bonk 1 sponsions____________ _ 1921-1929 . 1930--- !_ 1931 , 9.2 *3.7 *9.5 13 .U 53.5 2:2 39-5 53.6 fo.5_______ 25.6 >6.5 5 *f 8.H 12.6 - While there was no single bank failure during the year approxi»at 1 ng in site the of the United States, He» Yoxfc, »hidi suspended in 1930, quite a number of suspended banks were of substantial site. The largest bank fail- urs during the year was the Bank of Pittsburgh, N. A., Pittsour^x, ?a., with deposits of about $44,000,000. In 193*. 32 suspended banks had a capital of Federal He serve Board - $1 ,000,000 or sore, as compared with 1 1 the year before and only 9 9-year period 1921-1929, the All of these 52 banks are listed In Table Ho. 1 submitted herewith, A geographic distribution of bank suspensions in 1931 shews the great* est proportionate increase in the North Central, Middle Atlantic and Hew England State*. In the Middle Atlantic States the number of bank suspensions in 19 3 1 was 250 , as compared with 32 in 1930 and a yearly awrage of 9 during 1921-1929; in the North Central States, 6 ll banks suspended in 1931. a* com pared with 286 in 1930 and a yearly average of 90 daring 1921-1929 ♦ ahd In the Hew England States the number of bank suspensions in 1931 «as 33, as compared with 13 the year before and an annual average of 2 for the 9-y®ar period 19 21 1929 . The following table shows the number of bank suspensions, by geographic divisions, in 19 3 1 , in 1930 , and in 19 2 1 - 1929 , together with a yearly average for the latter periods Hew England States Middle Atlantic States North Central States Vi O Geographic Pivision '■— | ... .. — ........ . 1 1 19 31 33 250 6 ll | 1930 13 32 286 South Mountain States South Eastern States South Western States 152 2 U5 x jk 276 201 Western Grain States Rocky Mountain States Pacific Coast States 717 62 H13 25 Total, United States 87 5* 12 2,298 l.3>*5 aank suspensions------------________ 1921-1929_________ Total for Yearly 9 T W ______ M P B M » __ 2 9 50 21 103 77 291 59 16 82 1&9 188 929 /a L 694 2,620 534 15 130 627 5 .6M2 Federal H e l e n a Board - #5 While the number of bank suspensions in 1931 was about four times the /early average for the 9-7 »*r period I92 I-I929 , the deposits of the banks that suspended in 1931 were about dLne times the yearly average for that period. As inchoated by the table belof, the largest relative increases sere reported for the Hew England, Middle Atlantic and Horth Central Staten. _________ Geographic Division 1931 lev England States Middle Atlantic States Worth Central States 117.0 38 1*62 ,1*91 36,8»H 21*2,1)23 1>*5.9*7 2.903 8,826 16.777 79.*30 150.993 107.039 152.589 §9,21*8 6,000 36.285 20.732 53.999 326.567 186,586 73.te3 17.763 8.588 660,807 19.909 33.256 89.617 7 ,91*5 11.0 6 6 1,691,510 861*.715 19 1.2 9 7 1,721.673 627.81*9 South fountain States South Rasters States South Western States 78,339 93.28»* Western Grain States Rocky Mountain States P&dLflo Coast States 190,031 Total, United States Deposits of suspended basks (In thousands of dollars)____ ________ 1921-1929_________ _ Total for Yearly 1930 average 69.263 26,126 159.871 77.291* \ Of the 2,29$ banks that suspended last year, U09 were national banks, 10S state bank members of the Federal Reserve System, and 1,781 nonmember banks. The deposits of suspended national banks aggregated $^39,171,000, of state bank members $29^,357 ,000, and of nonmember banks $957 ,982,000, a total of $1,691,510,000. These figures are kioen in detail, by states and Federal rea rve districts, in the February issue of the Federal Reserve Bulletin, pages 132 and 13 H. In addition to the list of 'banka with capital of $1 ,000,000 or m o m that suspended dorixjg the period 1921-1931 (table Ho* 1), prewiously referred to, two tablet are submitted herewith at fbllovtt Table No. 2 — Humber, capital, and deposits of all banks suspended and of reopened banks In 1931 • by statet. Table Ko. 3 — Distribution of nomber of bank suspensions in 1931* 1930 , and 19 21 -1929 t according to capital stock and according to population. V Fo rm No. .131 FEDERAL RESERVE BOARD Mr. Hamlin To Date__ March 8,1932. Subject: F r o m _______ Mr. Wyatt, General Counsel. 2— 8495 There is attached hereto for your information a copy of H.R* 10,241, the "bill which was introduced in the House of Representatives on March 7, 1932, by Congressman Steagall and which was discussed in the newspapers this morn ing* Among the important features of this bill affect ing the Federal Reserve System are a provision for the guaran tee of bank deposits for member banks, authority for member banks to make "exchange charges" on checks and a provision for a dis tribution to member banks of one-half of the net earnings of Fed eral reserve banks. A more detailed analysis will be prepared by this office as soon as possible* . Respectfully, Eill attached. VOLUME 225 PAGE 6l 6 / O ffice Correspondence To_ Mr. Hamlin FromfW. Smead FEDERAL RESERVE BOARD Date. March 9, 1932 Subject: Estimated possible increase in J*free gold" under the Glass-Steagall Bill In accordance with your request, we have prepared the attached statement showing the amount of free gold held by each Federal reserve bank on Febroary 27, 1932, the date on which the Glass-Steagall Bill was approved, and the amount of free gold which each bank would have had if all United States secu rities owned had been pledged as collateral security for Federal reserve notes as authorized by the bill. Two Federal reserve banks, Hew York and Dallas, had more than enough eligible paper and United States securities to pledge as collateral for Federal reserve notes to bring their free gold up to the amount of their excess re serves. In the case of the other ten Federal reserve banks, the increase in free gold would have been equal to 95 per cent of the amount of their holdings of United States securities. By pledging United States securities against Federal reserve notes an equal amount of gold collateral is released but 5 per cent of the amount so released would have to be added to the gold redemp tion fund. If all United States securities held by the Federal reserve banks on February 27 had been pledged with the Federal reserve agents, the free gold would have been increased by $b62,10H,000. On that date the Federal Reserve Bank of New York held $29,0*+U,000 and the Federal Reserve Bank of Dallas $13*993*000 more United States securities than they needed to pledge with the Agents to bring their free gold up to their excess reserves, and if these securities had been distributed among other Federal reserve banks the free gold of the System could have been increased by $702,990*000, instead of VOLUME 225 PAGE 71 - 2- $6b2,10U,000, i.e., by 95 per cent of the total amount of United States securities held by the Federal reserve banks on that date. :.5: >• “FREE GOLD" HELD BY FEDERAL RESERVE BANKS ON FEBRUARY 27. 1932. ON WHICH DATE THE GLASS-STEAGALL BILL WAS APPROVED / Federal Reserve Bank Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Total Free gold Feb .27, 1932 Excess reserves, Feb. 27. 1932 $102,6U0,000 $15,958,000 2o9,UU2,000 $69 ,306,000 500.739.000 20.359.000 29.609.000 76.090.000 95.011.000 1 1 .U2 7.0 0 0 2U,gOU.OOO 3.799.000 2 5 .2 11,0 0 0 g,06 l ,000 15.7S7.000 127.U75.000 339.57U.OOO 3U,65s,000 U5,702,000 75s ,ooo 27.719.000 3 3 .3 U1.0 0 0 8 ,059,000 27.030.000 32.UU6.000 16.536.000 53,Ui3,ooo Ull.191.0 00 1,073.295.000 1.392.91s.000 1H.67U .000 3,?3U,ooo f DIVISION OF BANK OPERATIONS MARCH 9. 1932 Free gold Feb .2 7 , 1932,if all U. S. securities owned were used as col lateral for F. R. notes 500.739.000 77.319.000 110.528.000 U2,670,000 Ui,58 7,0 0 0 16.536.000 5U,563,000 Dear Charles: In further answer to your letter of January 28th as regards the Trench dett, Z would put the matter in this ways She French debt prior to funding* was approximately 4*2 billions* of which 2*6 represented the war debt* and 1*6 the post war debt* She amount which Trance will have paid at the end of 62 years on the bonis which she gave* computed at 1*64$ interest* the agreed rate would amount to 6*8 billions* Trance has a legal right to pay at once either 4*2 billions* or to pay* spread over 62 years* 6*8 billions* and this is all the right she has* You stats that the present worth of the whole original debt* — 4*2 bill i n e # «• plus interest for 62 years at the rate of l*64^e - is 1*6 billions* and this being about the same as the post-war debt, y ou argue that the war debt has practically been forgiven* The above figure* however* is not correct* The present worth of 6*8 billions* computed at 1*64^* is 3*4 billions* which is a sun larger than Trance's original war debt* The figure y ou reach of 1*64 billions is obtained by using an interest rate of 5>»* and not the agreed rate of 1*64>3« VOLUME 225 PAGE 73 Secretary Hal Ion had no authority, of course* to s u gest to France that he would accept the present value computed at 6/* nor did h e ever make such an offer* The present worth of any tun payable In the future differs In propor tion to the rate of Interest used In computing it, and It le an absolutely hypothetical deduction* having nothing to do with the rl<£its of either party* That It Is purely hypothetical would appear from the followlngt If the United States had charged France 5$ Interest* Instead of 1*64^* on her bond payments* she ^ould hare paid* spread over 62 years* 11*4 billions* whereas by charging only 1*64^* the total amount she has to pay Is 6*8 billions* The difference between these suns Is 4*6 billions* which Is larger than the total original war and post-war debt owed by France* On these hypothetical figures* one could say that the United States has forgiven France 4*6 billions* which Is none than her original war and post war debt* and therefore that we have forgiven France her whole debt* althou^i to that country It looks as If she would have to pay 6*8 billions for & total indebtedness of 4*2 billions* Let me know how this strikes you* Sincerely yours* J Hon* Charles Warren* Mills Building* Washington* D* C* ■ r • « t /Ui 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 TW E FEDERAL RESERVE BO ARD X-7115 March 10, 1932. SUBJECT: Advances to member banks under SectionslQ(a) and 10(b) of the Federal Reserve Act, as amended February 27, 1932. Dear Sir: - In view of the fact that advances tc member banks under the provisions of Sections 10(a) and 10(b) of the Federal Reserve Act, as amended by the Act of February 27, 1932, will be limited to cases where there are conditions of an unuc&al and temporary n* character, the Federal Reserve Board has not prescribed any regu lations governing such advances but ^ill consider each case sepa rately and will decide, on the basis of the facts and circumstances in each particular case, whether or not to permit the Federal de serve bank to make the advance applied for. However, in order that the member banks may be informed of the provisions of these sections and of the procedure contemplated thereunder, a committee of officers of Federal reserve banks appointed pursuant to action taken by the Conference of Governors of Federal reserve banks held in Washington on February 24 and 25, 1932, has prepared, with the assistance of counsel, a circular VOLUME 225 PAGE 87 X-7115 2 letter to "be sent by the Federal reserve banks to all member banks as soon as possible. While it would seem that the law would permit the Board to grant blanket consent for Federal reserve banks to make loans under the provisions of Section 10(a), the Board prefers for the present at least to consider each case separately; and the law requires separate action by the Board in the case of each specific loan under the terms of Section 10(b). Before making any loan or any renewal or extension thereof under the provisions % of either section, therefore, the Federal reserve bank should ob tain the Board’s consent. The Board is prepared to give prompt consideration to any application received under these sections. Each request for its permission to make such an advance must include a recommendation of the Federal reserve bank and should contain the following in formation: A. Name and location of borrowing bank. 33. Capital stock. C. Surplus and undivided profits. D. Whether the bank which is to receive the proceeds of the loan has an adequate amount of eligible and acceptable assets to enable it to obtain sufficient credit accommodations from the Federal reserve bank under other provisions of the Federal Reserve Act. * E. Amount of the loan applied for. F. Maturity of loan applied for. X-7115 3 G-. Proposed rdte. H. Nature and face amount of security offered. I. Total deposits of corroding "bank. J. Total amount of rediscounts and other "borrowings (including repurchase agreements) from Federal reserve "bank, exclusive of this lean. K. Amount of rediscounts and "borrowings (including repurchase agreements) from others.- L. Concise statement of exceptional and exigent cir cumstances which occasioned the application, together with any other facts having a "bearing upon the case. M. • Whether the application is for a loan under Section 10(a) or Section 10(h). N. ■ In the case of loans applied for under Section 10(a), name and address of each participating hank and the amount of liability assumed hy it, together with the nature and face amount of additional security, if any, required of it. HThen the information is transmitted hy telegraph, each item listed above may he indicated hy using the letter preceding such item, in lieu of stating the text of the question. The Board has not prescribed any limitation on the aggre gate amount of such loans which may he made hy any Federal reserve hank; hut, in acting upon requests for its permission to make such loans, will give consideration, among other things, to the aggre gate amount of such loans which the Federal reserve hank has outstanding. In making loans to groups of banks under Section 10 (a), the Federal reserve bank should reouire the trustee represent ing the group of banks to pledge with the Federal reserve bank X -7 1 1 5 4 the note of each bank which is to receive the proceeds of the loan and. the security therefor. The Federal reserve bank should assure itself that the trustee has be^n properly au thorized to pledge such note and security to the Federal re serve bank. In addition to the note of the borrowing bank and such security as it may provide, the Federal reserve bank may, if it deems it advisable, require the other members of the group to give such other security as the Federal reserve bank may consider necessary for its protection. In the absence of regulations and in order to insure uniformity of procedure, the Federal Reserve Board has approved in.e inclosed circular for use by the Federal reserve banks. It ?rill be observed that the Board has made certain modifications in the proposed circular which was transmitted to the Governors with the Committee's report of March 6, 1932. If any Federal re serve bank desires to make any further changes, in order to conform to local conditions or practices, it should communicate with the Federal Reserve Board and obtain its approval before transmitting the circular to member banks. The Board will give prompt considera tion to such changes. This letter is solely for the information and guidance of the Federal reserve banks. Very truly yours, Chester Morrill, Secretary. Inclosure. TO GOVERNORS OF ALL F. R. BANKS. X-7115-a CIRCULAR LETTER FROM FEDERAL RESERVE B A M S TO THEIR MEMBER BANKS Subject: Amendment to Federal Reserve Act by Act of Congress approved February 27, 1932. The Act of February 27, 1932, adds two new sections to the Federal Reserve Act, Section 10(a) and Section 10(b). Section 10(a) authorizes the making of loans to groups of member banks and is a permanent provision, whereas Section 10(b) authorizes until March 3, 1933, advances to individual member banks having a capital stock not exceeding $5,000,000 each. Under both sections, the banks receiving the proceeds of such advances must be without adequate amounts of eli gible and acceptable assets to enable them to obtain sufficient credit accommodations from the Federal Reserve Banks under other provisions of the Federal Reserve Act. The full text of these two sections of the Federal Reserve Act is printed at the end of this circular. In view of the fact that it is contemplated that applications for such advances will be made only in unusual circumstances, the Federal Reserve Board has not prescribed any regulations governing such advances, but, for the information of all member banks, the principal requirements of the law are analyzed and the general procedure contem plated thereunder is outlined below. SECTION 10(a) ADVANCES TO GROUPS OF MEMBER BANKS This section provides in effect that, upon receiving the con sent of not less than five members of the Federal Reserve Board, any Federal Reserve Bank may make advances, in such amount as the board of ■2- X-7115-a directors of such Federal Reserve Bank may determine, upon the following conditions: (a) Advances may he made on the promissory notes of groups of five or more member hanks within the district of the loaning Federal Reserve Bank, a majority of them indepen dently owned and controlled; except that advances may he made to a lesser number of such member hanks (hut not less than two) if the aggregate amount of their deposit liability constitutes at least 10 per centum of the entire deposit liability of the member banks within such district. (b) Advances may be made only if the bank or banks which receive the proceeds thereof have no adequate amounts of eligible and acceptable assets available to enable such bank or banks to obtain sufficient credit accommodations from the Federal Reserve Bank through rediscounts or advances other than as provided in Section 10(b) of the Act. (c) The liability of the individual banks in each group must be limited to such proportion of the total amount advanced to such group as the deposit liability of the respective banks bears to the aggregate deposit liability of all banks in such group. (The liability of each individual bank on the note of a group under this provi sion of the law should be determined on the basis of its gross deposit liabilities at the opening of business on the date of the written application by the group to the Federal reserve bank for the advance, computed by adding together, (1) in the case of national banks, the figures corresponding to those called for by items 21, 22, 23 and 24 on the Comptroller of the Currency’s call report form No. 2130, as revised in November, 1931, or, (2) in the case of State member banks, the figures corresponding to those called for by items 19, 20, 21 and 22 on the Federal Reserve Board’s call report form No. 105, as revised in November, 1931.) (d) The proceeds of an advance to a group may be distributed only to banks which are members of such group, and before receiving such proceeds such banks must deposit with a suitable trustee, designated by and representing the entire group, their individual notes made in favor of the group protected by such collateral security as may be agreed upon. (e) No obligations of any foreign government, individual, part nership, association or corporation organized under the laws thereof shall be eligible as collateral security for advances under this section. -3- X-7115-a (f) No note upon which such advances are made will he eligi ble as collateral security for Federal Reserve notes. The rate at which advances may be made under the provisions of this section will be fixed from time to time, subject to the approval of the Federal Reserve Board and the condition specified in the law. The maturities of notes accepted under this section must be satisfactory to the Federal Reserve Bank. There must be deposited and pledged with the Federal Reserve Bank, as security for any advance made by the Federal Reserve Eank to a group of banks under the provisions of Section 10(a), the note or notes of the bank or banks to which the pro ceeds of such advance are distributed by the group, together with all the security for such note or notes. Such security must, of course, be acceptable to the Federal Reserve Bank, which may require the group or any member thereof to provide such additional security as may be deemed necessary. For the convenience rf member banks desiring to apply for loans under Section 10(a), the following suggested forms are being prepared. 1. Resolution to be adopted by board of directors of each of the banks desiring to form a group, authorizing their officers to sign an agreement with other banks for this purpose. 2. .Agreement to be entered into by banks desiring to form a group. This form of agreement includes the designation of a trustee for the group. 3. Resolution to be adopted by board of directors of indivi dual borrowing bank authorizing it to borrow from the group and to pledge security therefor. 4. Application to be used by individual borrowing bank in requesting loan from the group. This must include a certificate to the effect that such bank has no adequate amount of eligible and acceptable assets available to enable it to obtain sufficient credit accommodations from the Federal Reserve Bank through rediscounts or advances other than as provided in Section 10(b). -4- X-7115-a 5. Note to "be used, by the individual borrowing bank in borrow ing from the group. 6. Resolution to be adopted by the board of directors of each of the banks in the group, authorizing the group to borrow from the Federal Reserve Bank upon the note of the group and to pledge the note or notes of the individual borrowing bank or banks and the security therefor. 7. Application to be used by group in requesting advance from the Federal Reserve Bank. 8. Note to be used by the group in borrowing from the Federal Reserve Bank. This form contemplates that the group shall give to the Federal Reserve Bank a single note for the full amount of the advance, such note, or counterparts thereof, being signed by all members of the group and stating on the face thereof the dollar amount of the proportion of the principal of such note for which each bank in the group is liable. ' Banks desiring to form groups, or contemplating the possibility of forming groups at some future time, should so advise this bank, which will be glad to furnish them with copies of the suggested forms. suggested that each group be fermed under the name Group No. ____ of the It is "Member Bank Loan Federal Reserve District." In order to prevent possible duplication of numbers in the names of groups this bank will assign numbers when advised of the desire to form groups. The forms used in different cases may vary to some extent to meet the needs and desires of the banks forming the particular group, but all forms used in connection with any advance made by this bank must, of course, be satisfactory to it. SECTION 10(b) ADVANCES TO INDIVIDUAL MEMBER BANKS Under the terms of this section Federal Reserve Banks may, until March 3, 1933, and in exceptional and exigent circumstances, and subject in each case to affirmative action by not less than five members of the Federal Reserve Board, make advances to individual member banks upon the following conditions: -5 - X-7115-a (a) Advances may be made only to member banks having c a p ita l stock o f not exceeding $5,000,000 each. (b) Advances may be made only to banks which have no fu rth e r e lig ib le and acceptable a sse ts a v a ila b le to enable them to obtain adequate cre d it accommodations through r e d is counting a t the Federal Reserve Bank or any other method provided by the Federal Reserve Act other than that pro vided by Section 10(a). (c) No o b lig a tio n s of any fo re ig n government, in d iv id u a l, p a rtn e rsh ip , a sso c ia tio n , or corporation organized under the laws thereof s h a ll be e lig ib le as c o lla t e r a l se c u rity fo r advances under t h is se ction . (d) Advances under t h is se ctio n may be made only upon the prom issory notes o f member banks secured to the s a t i s fa c tio n o f the lending Federal Reserve Bank. (e) No note accepted fo r any such advance s h a ll be e lig ib le as c o lla t e r a l se c u rity fo r Federal reserve notes. The rate at which advances may be made under the p ro v isio n s o f t h is se c tio n w i l l be fix e d from time to time, subject to the approval of the Federal Reserve Board and the co n d itio n sp e c ifie d in the law, A sp e c ia l form o f a p p lic a tio n i s being prepared for the use o f member banks d e s ir in g to apply fo r leans under Section 10(b). Copies w i l l be provided upon request. Each such a p p lic a tio n must include a c e r t if ic a t e to the e ffe c t that the a p p ly in g bank has no fu rth e r e lig ib le and acceptable a ss e ts a v a ila b le to enable i t to obtain adequate cre d it accommodations through re d isco u n tin g at the Federal Reserve Bank or any other method provided by the Federal Reserve Act other than that provided by Section 1 0(a); and i t must a lso be supported by a statement o f f a c t s s u ffic ie n t to s a t i s fy the Federal Reserve Bank and the Federal Reserve 3oard that there are exceptional and exigent circum stances which would j u s t i f y the mailing o f such loan under the p r o v is io n s of Section 10(b). 4% -6- X-7115~a The regu lar form o f member bank prom issory note may be used ; . h/'jjWfor advances made under t h is se ction . . \ the Federal He serve Bank. M a tu ritie s must be s a t is fa c to r y to ' i 1/ •* > 3* j- . ' GENERAL In conformity w ith the purposes of th is le g is la t io n , advances V* ' under Sections 10(a) and 10(b) o f the Federal Reserve Act w il l be lim ite d .A . ™ a to cases where there are conditions o f an unusual anji temporary character which appear to j u s t if y such action and when the member banks re c e iv in g ' 'J3 SgMr ’ ' 4^-^ Jr . ■ W ; the proceeds la c k adequate amounts of e lig ib le and acceptable a ss e ts with which to secure s u ffic ie n t cre d it accommodations from the Federal Reserve Bank under other p r o v is io n s o f the Federal Reserve Act. When and i f such circum stances e x is t i t i s hoped that t h is bank may be able to render h e lp fu l service fo r temporary pe rio d s. I t i s suggested, however, that before making a p p lic a tio n s fo r such advances member banks should communi cate w ith t h is bank and a sc e rta in i t s views as to the c o lla t e r a l or other se c u rity which should be offered and as to the other co n d itio n s upon which th is bank would be disposed to give favorable co n sid e ratio n to the a p p li cation. APPENDIX (Here p r in t t i t l e and f i r s t two section s of A ct.) /Ui Form T&.x31 Office Correspondence Mr. Hamlin To. From Mr. Smead FEDERAL RESERVE BOARD Date. February 20, 1932 Subject; Changes in reserve bank c r e d it. production index, and member bank _______ lo a n s . A In response to your telephone request, we have prepared and are handing you herewith — (1) A ta b le showing tho index o f in d u s t r ia l production, the amount o f r e serve bank c re d it, o f se c u rity loans and o f “A l l other" lo an s o f weekly r e p o r tin g member banks, on J u ly 1 3 ,-192 7» January U, 1928, J u ly 11, 1928, February 6, 1929, June 5* 19?5* and October 23, 1929; (2) A s im ila r table showing the change, in each o f the item s, that took place between the consecutive selected d a te s. We included fig u re s for January 1928, in a d d itio n to fig u r e s for the dates mentioned by you,for the reason that in January 1928 the Federal re serve banks began to reduce th e ir h o ld in gs o f United S ta te s Government se c u ritie s and to increase discount rate s. VOLUME 225 PAGE 109 RESERVE BANK CREDIT, PRODUCTION INDEX, AND LOANS OF WEEKLY REPORTING MEMBER BANKS, ON SELECTED DATES (Amounts in millions of dollars) July 13, 1927 Reserve Lank credit United States securities in Special Invest ment Account ^^jndex of industrial production (monthly)* Loans of all weekly reporting member hanks: On securities - total To brokers and dealers in New York To others All other loans Loans of weekly reporting member banks in New York City: On securities - total To brokers and dealers To others All other loans Brokers* loans by weekly reporting member banks in New York City: Total (for all accounts) For own account For out-of-town banks For others Jan. 4, 1923 July 11, 1923 February 6, 1929 June 5, 1929 1,102 i,6o4 1.5^2 1,50 0 1 ,3 0 3 1,37^ 251 423 85 76 33 23 106 105 109 118 127 113 6,152 (a) (a) 8,590 7.022 7,0 0 3 (a) U) 7,558 1,771 5,787 7 ,1 9 7 1 ,1 2 2 6 ,0 74 8,652 (a) (a) 3,339 8,696 9, i 4o 7,920 1,480 6,44o 9,580 2,249 991 2,9 15 1 ,5 1 1 2,357 2 .67 s 1 ,1 1 6 1 .2 5 8 1,404 2,489 837 l,84l 2,731 2,400 3,059 991 1 ,204 3 63 3.810 1 ,5 1 1 1 ,3 7 1 92 s 2,666 942 1,724 2.605 4,21+3 9^2 1.554 1,747 ♦Adjusted for seasonal variation; 1923 - 1925 = 100 (a)Not reported separately. S f October 23, 1929 l,74l 2,464 v 5.669 1 ,1 1 6 1.931 2,621 5,284 837 1,513 2,934 3 ,0 0 5 1 .0 7 7 1,928 2,894 6,634 1,077 1,733 3,823 SELECTED PERIODS (Amounts in millions of dollars) July 13, 1927 to Jan. 4 1928 ” Jan. 4 to July 11, 1928 July 11, 1928 to Feb. 6, 1929 Feb. June 5 to 6 to Oct. 23. June 5, ..,-1929_____ .... 1323. Reserve bank cre d it United S ta te s s e c u r it ie s in Sp ecial In v e st ment Account + 502 - 62 - 42 - 197 + 172 -338 - 9 - 43 Index of in d u s t r ia l p rod uction (m onthly)* - 1 + + 8 + 9 - 361 >723 - +358 4 Loans of a l l weekly re p o rtin g member banks: (a) (a) (a) (a) +237 -193 + 444 +44o 666 -299 +191 +179 + 520 + 146 -5 6 9 +320 +17*+ + 17 -279 +100 +327 +240 + 87 89 +116 -l9i +267 +163 + + 751 +933 +1,926 -385 +1 .3 5 0 + 520 + 167 + 65 -5 6 9 +179 +377 +879 -279 -418 +313 + 290 + 220 + 889 + 62 + - 19 Loans of weekly re p o rtin g member banks in New York C ity : B ro kers1 lo a n s by weekly re p o rtin g member banks in New York C ity - to ta l For own account For out-of-tow n banks For o th ers +183 +819 variation; 1923 - 1925 = 1 0 0 . (a) Not reported se p a ra te ly. 9 (a) A ll other lo a n s A l l other lo a n s - 649 + 287 + To bro kers and d e a le rs To others 10 - +555 (a) 870 On s e c u r it ie s - to ta l To b ro k e rs and d e a le rs in New York To o th ers On s e c u r it ie s - to ta l + 71 +366 SLe*. *- / tj 'l. 'I — l 6j 2- <^ / ^ 2- / f l-Z . JU*m , 3 3 *Ct 7* V 1 '• /. 3 * 7 'ti % / ? t-^ - ■*-^ m /L^*c-* ■•■** / t 2.1. O/ S ,/: I / < y ^ - /?*-?• 3 / /^ V 3 / A /4 i /i -~ /Af~ / t^O /o / y V * "I y~ / * / " * - y~. . y ^ < * / & . 3~? J U . -*-*■** / £> / c> / /Vo) y*r 7 X ^ , . 2 ^ _ >r / J £^*-~ w « . /U. . 2 - — / 6 /-£ <x £x?VJ 'J J O .^ — *-*■»— /Lt*. X * c~/k /^, -2.^ / •*'?’ - /zJ ♦ 2. •*- - / / JL7 /^i^u L /L a- sX<^ O -i^ > */ /*/£ > > J~w \* * ~ / a. t /U * - £y / A w [a ^ c^ ^ y< s*A - f 1 i-*- [jiA J -t - < -* . £~f«. J-H» i^t- ? • " — *• ort» '*— -*X *"* / J'ZL"4tf »A / yii, i.3> /«3* W i uu^. -2_. / $r*- V^ ~ Ae* ^ « V * x7 . A f i- ten *s&G . 2> - • -6 4>t. C< X i and C f Id ntl 1. Ttmw 1 0 . P l a t t l . X Ibw B e d a n l • noto of y o u r re s e rv e n o te s M a rc h s h o u ld h e 7 th . fo d e Xa g re e a l ith re s e rv e y o u bank In p r in c ip le , n o te s , and th a t th a t th e re is no n e cessity fo r any c o lla te r a l other than the 40* o f /p ld reserve. X used to think that c o lla te r a l e i required in osder to p rotect the OoveRHMnt which in lia b le on the fed eral reserve n o te s, as w ell as the fed eral reserve bank through which they are issued* X an s a t is fie d , how ever, that th is i s a a lsta k e f that the real reason fo r requiring c o lla te r a l was to t ie uoen fed eral reserve notes and lim it then to the amount o f e lig ib le paper. 'Ihis ce rta in ly wos a very strin gen t lim ita tio n on th e ir is s u e . She attend.iont o f 1917, however, staking •old acceptable as c o lla t e r a l, removed to a vexy grat degree any lim ita tio n on fed eral reserve not e . It does, however. Impose a lim ita tio n on the power o f a fed eral reserve bank, fo r example, to engage in open market gold as collateral noceesarily lowers Operations, fo r the necessity o f keeping the amount o f gold which can be used fo r other purposes. This lim ita tio n , t t u f a f , works exactly Opposite to #»at we a t f i r s t sig h t would suppose, - VOLUME 225 PAGE 111 th at is to soy, i t does not e ffe c tiv e ly lim it cre d it expansion when such lim it is d esired , nor does i t perm it adequate steps being taken to prerent disastrous cre d it d e fla tio n when an easy m oney p o licy Is desired* Tor example, ju s t b efore the G l& ss-Steagall b i l l was enacted, the fr e e gold o f the System was reduced to s l l ^ i t l y over 400 m illio n s , due to the fa c t that member banks had l i t t l e e lig ib le paper to d ep osit as c o lla te r a l fo r fed era l reserve n o te s, and therefor© had to su b stitu te gold* With th is r e la tiv e ly lim ited amount o f fre e g o ld , the System could not sa fe ly purchase many Government se c u ritie s fo r the purpose o f easing the cre d it situ a tio n and checking the contraction taking place in member bank credit* On the other hand, in 1939, when cre d it was expanding a t a very rapid r a te , and a t a time when a firm ing p o lic y m s in e f f e c t , the fre e gold o f the System rose to over 1 b illio n d o lla r s , owing to the fa c t that there was plen ty o f e lig ib le paper to cover Federal reserve n o te s. At that time the Federal reserve banks held only 200 m illio n s o f Government s e c u r itie s , and could e a s ily have purchased several hundred m illio n s more without risk o f any shortage in the gold c o lla te r a l behind Federal reserve n otes, but a t that time such purchases were undesirable* I fe e l that the c o lla te r a l requirement should ce rta in ly be changed so as to include any paper or se c u r itie s which the Federal reserve banks can acquire under the Federal Reserve A ct, or b e tte r s t i l l , that the requirement fo r c o lla te r a l be e n tir e ly elim inated* I t may w ell “be that in ouch case the power o f the System to expand cre d it on i t s own in it ia t iv e should be co n tro lled , but th is control should be b r o u g h t about through some other lim ita tio n , e .g . by a lim ita tio n on the au th ority to purchase se c u r itie s in the open market* I have w ritten th is very h u rried ly , and perhaps have not fu lly thou^it i t out# Please regard i t as c o n fid e n tia l, and l e t me know how i t strik e s you* Sincerely yours. Hon. Edmund P la t t , Tice P resident, The Marine Midland Corporation, 180 Broadway, Hew York C ity , H. Y* Fo rm No. K\1 O ffice Correspoi ence To Mr. Hamlin FEDERAL RESERVE BOARD Date,March 9, 1932 Subject: From Mr. Smead 2 — 8495 I have read with much interest your correspondence with Mr. Platt which is returned herewith. The question as to whether of nor Federal reserve notes should be issued against specific collateral pledged with the Federal reserve agent or against the general assets of the bank is one of fundamental importance and involves the basic theory upon which the Federal Reserve Act was written. The real purpose in requiring specific kinds of collateral to be pledged with the Federal reserve agents against issues of Federal reserve notes, as I understand itj was not so much to protect the governments liability on the notes as the notes are prior lien on all the assets of the banks,but to limit note issues to the demands of commerce, industry and agriculture as evidenced by the amount of commercial and agricultural paper held by the Federal reserve banks. To permit Federal reserve notes to be issued against the general assets of the banks would given the System an opportunity through large purchases of Government securities to take the initiative ih expanding the currency instead of requiring the initiative to come from the member banks. This, of course, is possible now to some extent through purchases of acceptances in the open market. The real bases on idiich credit expansion takes place in this country are the reserve balances maintained by the member banks with the Federal reserve banks and it is the volume of these deposits that need to be con trolled rather than the volume of Federal reserve notes in circulation - 2 - The basic question involved is, it seems to me, whether or not some limi tation should be olaced upon the System’s right to engage in open market operations, particularly the purchase of United States securities. To attempt to limit such operations through collateral requirements against Fed eral reserve notes is tantamount to locking the barn after the horse is stolen since once a substantial volume of credit is outstanding and member banks* fX deposit liabilities are expanding on the basis of such reserve balances, the member banks will of necessity borrow from the Federal reserve banks, to obtain such volume of currency as is needed to carry on their general operations. In other words, the volume of member bank reserve balances upon which credit expansion is based should be controlled by a sould credit policy^with such legal limitations on open market operations as Congress may see fit to impose J and the volume of currency in use should be automatically adjusted to current requirement s. To_______ __ M r* From _ _ __ M r , S in e a d ___ ____________________ Subject:________________________________ •to D e a r M r. I I a ls o th em _ 2—8495 'H a m l in __________________________ ___________________________________________ _____ _______________________ S raead: e n c lo s e e n c lo s e over, copy copy an d m ake o f o f any a n o te I a proposed c r itic is m s sen t r e p ly you to to M r. h im . d e s ir e ? Sincerely yours, P la tt, W ill and h is you r e p ly . k in d ly lo o k # M a r i n e E D M U N D M i RO O M P LATT VICE-PRESIDENT G r o u p , In c . d 120 8 2 0 B r o a d w a y Ne w Y o r k , NY 7, 1932• M arch H on. C h a r le s F ederal W a s h in g to n , D e a r M r. Y ou rs 40 D. o f itia tiv e o f \ o r ig in a l th e o iy ’ w h ich at be one s im p ly th e th e cen t one F ederal are Is la n d fo r m as th e banks had to th a n best m e r e ly sh ow i t is on reserve a th e w ith over o f h ig h w et w in d grou n d . us and o f I pow er th e sn ow and see at is in to sta tem en t heavy r a in , s p r in g w ea th er is very to th e em ergen cy u sed pay to o ff M a rch it s th e th e w ith is s in c e r e ly , can B u lle tin , fe w th is N ew ^ o r k fla k e s d o u b t le s s c o m in g . ra te d e p o s its , p rocess. we In a w h o le th rou g h in fla tio n n ew spapers w h ile in - banks r e d is c o u n t No rega rd s, Y ou rs con tra ry w hy m em ber is s h o u ld th e an th e it reserve on a n o th e r. in y e ste rd a y , th e y out by v .it h r e g u la r in your is s u e d su ch reason th e in c u r r e n c y ." w h eth er F ederal w h eth er I f is in no g a in in g H ow ever, b e tter but n otes me i s th e or cou rse, p o in ts o f by asset th e to banks. cu rren cy Bank fo r seem s a p p r o v a l, e ith e r p u r c h a s in g C ity i t m em ber p a s s in g th e s t r a ig h t c o lla te r a l cu rren cy cu rren cy m u ch i n t e r e s t e d a a c c u m u la te d th a t, m oney in s t e a d in c h e s fo r m ade q u e s tio n th e banks w as v e r y be B oa rd *s o f r a t e , w hen o f I a ssets th e s t ill fo r a lit t le several on N a tio n a l lo s e g lo a tin g had w ith reserve pay and o n ly in itia tiv e and in n e c e s s ity th e is s u e d p e n a lt y L ong W it h th e passed m em ber you be per We a r e o f r e s u lt, enough and to you w ith to on com e n o t e s **s h o u l d real r e q u ir e d th a t not any reserve, F ederal c h a n g in g p o s s ib ly and th e we h a v e ju s t reserve in itia t iv e , is s u e d | s h o u ld is n * t n o te s th e ir be has F ederal g o ld a llo w on a lw a y s 5t h th e th a t cen t to banks or B oard , C. c e r ta in ly per w is e H a m lin , H a m lin : sta tem en t T h ere S. R eserve o f fu rth e r m o r n in g and on snow advan ced March 5, 1932* Dear Ur* Platts X hare your note of March 4th* X agree with you that the federal reserve note should he made a straight asset currency* hut if course with some limitation upon the amount which may he issued* X do not see any necessity for collateral for these notes other than the 40?» gold reserve, as they are prior lien on sll the assets of the hank* X do not know that any loans have yet been made under the Glass Steagall emergency act, hut X presuae there soon will he some* Kith host wishes. Sincerely yours. Hon* Edmund Platt, Vice-President, Marine Midland Corporation, 120 Broadway, Hew fork City, H* Y. ♦ M i d l a n d M a r i n e E D M U N D G r o u p , In c PLATT VICE-PRESIDENT 120 B r o a d w a y N e w Y o r k ,N .Y 4, 1932 M arch H on, S, C h a r le s F ederal W a s h in g to n , D e a r M r. D. W h en I R e fo r m la s t be seem s dead th e w ith in h e ld S e n a to r B a n k in g fe w w eeks s e c tio n to I m an en t la w . \ 1 th e o th e r c a llin g dow n as fo r th e a in th e in i t w as sam e a ll r ig h t W ith at a th a t at or le s s A ct, be it n ot b u t, s h o u ld s h o u ld and cu rren cy b e in g F u rth erm ore asset cu rren cy. th a t o f o f su ch lit t le a lo a n s th e 3r d b e in g tim e and do th e re you b e in g as w h ic h , th is o ffs e ts i f g o ld it s at A ct, an a p o lic y it m e r e ly o f out to fir s t sh ow serves by it s p a n ts at an be ra te s a id th is ? th e w h ic h s in c e r e ly , on u n p reced en ted a lth o u g h ex p orts. very g o in g about rega rd s, lo u r s ’w i t h s o m e th in g does govern m ade p e r re -e n a ctm e n t g o ld is fe e l be in m eant is som e m e a n s a g a in m ade u n d e r h ow ever, p u rch ased , be cau gh t dem anded th in k H ow are fo r la s t , w ith G la s s -S te a g a ll M arch a g a in I th a t p e r m it tin g s h o u ld S y stem and N ovem ber and le a s t cu rren cy, th e O ctob er re G la s s m ore be th e th a t w a itin g in on c o n s ta n tly b e brou gh t w ith o u t ever £ s q u ite ^ w o u ld a c tio n ra te best is s h o u ld i t G la s s -S te a g a ll fo r I G la ^ e B a n ^ a ^ d eb a te o th e rs in to sta tem en t d is c o u n ts tw o th e th e r e ought to tim e . are fe e lin g or doubt d is c u s s e d c o lla te r a l seem s s e c tio n s e c u r itie s no th a t s a iH ^ th a ! i t o f an d p r o m is e d have th e iV cou rse one id e a me t h a t u n d ersta n d secon d th e as and th e w eek^ h u t t h e , to case s tr a ig h t I it b a ck u n p reced en ted at u sed My p r e s e n t hand, it C on gress be o f had h eard th e b ill h ave h eard I m any and I In and I I m ent b on d s up G la s s R e fo r m w h eth er th ir d b e fo r e s e s s io n . w hat h e s a id . O ne q u e s t io n th e W a s h in g to n a g a in be th e A ct a in dow n to fo r G la s s -S te a g a ll to saw y o u c o m in g b ill p o s s ib ly fe r r e d B oa rd , C. H a m lin : p r o b a b ly a g a in H a m lin , R eserve I to th e y or th a t U. th in k h o ld perh aps don’ t sh ow S. m ay b e dow n re Forpi No. 131 .Office Correspondence FEDERAL RESERVE BOARD D a t e ____M a r c h Mr. Hamlin 9 , 1932 S u b je c t:. "Experience in operating the Federal Reserve System has demonstrated that Ct i as a practical matter the only real purposobserved by requiring Federal re serve banks to pledge eligible paper with the Federal reserve agents against outstanding Federal reserve notes is to limit the amount of United States se curities which the Federal reserve banks may purchase. Strangely enough experience has shown this to work directly opposite from the manner in which it was interred, i.e., it has not been an effective means of limiting credit expansion but on the contrary has operated to prevent adequate steps being taken to limit credit deflation. For example, just before the Glass-Steagall Bill was enacted the free gold of the System was down to slightly over $U00,000*000 at a time when member banks were in debt to the Federal reserve banks over $800,000,000 and member bank credit had been declining at perhaps the most rapid rate since the System was inaugurated. Owing to the small amount of free gold held, the System could not safely purchase any material amount of United States securities for the purpose of checking the contraction taking place in mem ber bank credit. In 1929, however, when credit was expanding at a rapid rate, the free gold of the Federal reserve banks amounted to more than twice what it is now, or over banks held less than $ 1 ,0 0 0 ,0 0 0 ,0 0 0 . $200,000,000 At that time the Federal reserve of United States securities and on the basis of the amount of free gold available could readily have purchased several hundred millions of United States securities without running any VOLUME 225 PAGE 113 - 2 - risk of a shortage of collateral for Federal reserve notes. It seems to me that the requirement of the Federal Reserve Act that certain specified collateral be pledged with the Federal reserve agents against Federal reserve’notes issued to the Federal reserve banks has not served the purpose intended, and that the collateral requirement should ■ T either be eliminated or changed so as to include any paper or securities the banks are permitted to acquire under Sections 1 3 , 13 -a and lU of the ■ • * -•gv ~ - Federal Reserve Act. If a check is desired on the power of the System to expand credit on its own initiative it should be obtained throu^i some limitation on the authority to purchase securities in the open market. ile-c To lfc*o M o rrill From Mr. Sinead \\M March 1 1, 1952., Subject: Steagall Bill, H. B. 10241 In accordance with yodr telephone req iest o f yesterday, there i s attached hereto a statement showing the earn ngs, expenses, lo s s e s . e t c . , o f member banks during the year ended June 50, 1951, from which you w ill note that the net additions to p r o fits o f National banks fo r the year amounted to $ 5 2 ,5 8 5 ,0 0 0 , o f State bank members to $109 ,640-,000^ and o f a l l member banks to $ 1 6 2,0 2 5,0 0 0 . The earnings, expense and d,.v dend reports o f state bank members fo r the la s t h a lf o f 1951 have not yet been completely ed ited , but net p r o fits as reported by the banks amounted to only $lj,2'.B ,000, as compared with $6r%275.000 in the f i r s t h a lf o f 1931. Corresponding figoreB fo r each Federal reserve d is t r ic t are shown in the second table submitted herewith. The fig u res fo r the la s t s ix months o f 1931 may be changed s lig h tly when the reports ha~e been completely edited and tabulated. We also find that during the la s t h a’f o f 1931, 427 State bank members o f the t o t a l o f 878 reported a net lo s s fo r the period. shown, by Federal reserve d i s t r i c t s , in a third ta b le a This i s * You may also be interested in a table prepared by the Committee on Branch, Group and Chain Banking, a copy o f which i s attached, showing the percentage o f National banks; in various size groups, that reported annual net lo sse s or ho net earnings fo r the years 1926 * a.y50, both in clu siv e . The S tea g a ll b i l l does not state s p e c ific a ly, in Section 202 ( a ] , how average d ep osits, other than time d ep o sits, are to be determined. The only average d a ily fig u res o f deposits which we have are those o f *nefc de mand deposits on which reserves are computed* and "time d e p o sits.* Y 0 1 ,. o q k , calendar year 1931 net demand deposits on which reserres are computed a v er- \ PAGE 119 7 aged $1? ,7 4 5 ,0 0 0 ,0 0 0 and time d ep rsits $ 1 3 ,0 7 2 ,0 0 0 ,0 0 0 * For tho EAESOTGS AND 3DCR38SES OF »B, R BANKS DURING 031. YEAR ENDED JURE 30, 10c L (In thousands of dollars) All member banks OroBS earnings; Interest received* On loans (2) On investments (3) On balances with other banka Domestic exchange and collection charges Foreign exchange department Oommissions received Trust Department Profits on securities sold Other earnings Total earnings Expenses; Salaries and wages Interest paid * On borrowed money (8 ) On denosits*7 Demand Bank Taxes Other expenses Total expenses Net earnings Recoveries on charged-off assets: Doans and disoounts Bonds, securities, eto0 All other Total, net earnings and recoveries Losses charged off: On loans and discounts On bonds, securities, ©to. On banking house, furniture* and fixtures All other losses Total losses charged off Net addition to profits Number of banks, June, 1931 memberr; 1,816,618 490,950 37,905 760,371 319,546 28,247 456,147 171,404 9,658 10,460 23,931 24,139 79,730 83,727 338.569 15,058 730 26,687 60,306 90,120 3,402 8,681 23,409 53,043 33,421 42,449 441,797 275,028 166,769 15,457 9,018 6,439 437,323 189,382 69,634 105,398 251*026 597,418 287,420 506,095 46,101 64,069 158,453 946,184 360,131 149,905 83,787 £3,533 41,323 92,573 864As? 237,287 23,006 12,926 13,088 16,582 9,295 9*355 6,424 3,631 5,733 646,438 395,363 231,075 258,807 168,654 186,589 119,085 72,218 49,569 30,318 26,634 18,408 18,896 342,9^8 11,910 7.738 7,781 6,800 981 2 ,10? 1.889 i.bio.Bii ' . (1) Member banks only, i0e., exclusive of national bahki, in Alaska and Hawaii* (2) Includes discount0 \Z) Includes dividends0 FEDERAL RESERVE BOARD DIVISION OF BANK OPERATIONS NET PROFITS OF STATE BANK MEMBERS OF THE FEDERAL RESERVE S Y S ® ! DORING 1951, BY DISTRICTS ' (In thousands of dollars) Federal Reserve District Boaton First half of 1931 Second half of 1931** Calendar year 1931** 4,397 1,598 6,195 31,430 -3,305* 28,125 Philadelphia 6,034 -1,375* 4,659 Cleveland 7,915 7,313 13,728 Richmond 1,345 -732* Atlanta -5,670* -465* Chicago 14,689 New York 8 tr> Louis 2,041 -2,960* >525* 613 -4,136* 11,729 1,716 Minneapolis 118 =31* Kansas City 511 *88 799 Dallas 321 =886 * 35 San Francisco Total 87 1,944 1,058 30002 67,275 1,278 68,553 %et loss **Figur©3 covering the last six months of 1931 are pre liminary and may be changed upon completion of the examination of the reports of individual banks*. FEDERAL RESERVE BOARD DIVISION OF BANK OPERATIONS TOTAL NUMBER OF STATE BANK MEMBERS OF THE FEDERAL RESERVE SYSTEM AND NUMBER THA * REPORTED A NET LOSS FOR THE LAST HALF OF 1931, BY FEDERAL RESERVE DISTRICTS (Preliminary figures — subject to correction) Federal Reserve District if * Total number of state bank members Boston • • 9 0 » Number that reported a net loss for last ha*.f of 1931 30 9 142 79 Philadelphia 75 . si OLeyelaad 70 26 Richmond 32 12 44 29 ±75 95 New York Atian ’» * Ohi ;ago Sto Louis ♦ 86 34 Minneapolis 40 19 Kansas City 25 12 Dallas 67 41 San Francisco 96 57 878 427 Total ^Includes one bank for which no report has been received* FEDERAL RESERVE BOARD DIVISION OF BANK OPERATIONS maEi£AOL> i ,&S S5Q7-..,-r - OB NO HI:.? :JLBNd 'v; LURING I K IfgQ XATlM &u £W J *L m ** , ^aped j :-. to 3iza *? Loan^ tqg Inre^t^ett ■ b iz e Grevr • •• •*t— **— -« Tiban£ ■— n ■^H »I—«and iiITstd*r ■ KO t to 7? ^ 000 14 6 ,00 ng(»y ) 38> to 250,000 c; ? to 50 >000 -*}> * '-■-.IN 10 7tag 3jCda** I. ■—l■Mfclli ■ III . ^ 55,0 iir^ooo if50?f J. v >55 SE tags of it*‘ o 1,0 .0,0 X. t M *v t O X) t :vo « .-O i-'O -'l t s 10 0 0 0 -0 0 0 ' : Ol )0 to 00 0 0 0 , 00 c * ;o -..00 and o?ar S»* *-«5 * •/ *’ ? fa Form No. 131 Office Correspondence To_ From FEDERAL RESERVE BOARD Mr, Hamlin, M r* Date March 16, 1932, Subject:_„The p ro v isio n s o f the S te a g a ll B i l l ( H, R. 10241) re par d e a r c r e d it . W y a tt* 2— 8405 In a d d itio n to p ro v id in g fo r the guaranty of bank d e p o sits (on which I understand that the D iv is io n o f A n a ly sis and Research and the D iv is io n of B ak Operations are preparing m a te ria l) the S t e a g a ll B i l l (H* R. 10241), on which he arin gs are now being held, co n tain s: 1, A p r o v is io n (Se c tio n 6) a b o lis h in g the par clearance of checks and s p e c if ic a lly a u th o riz in g the member banks to charge Mexchange11 at a rate not exceeding 10^ per $100 in re m ittin g fo r checks drawn on themselves; and 2. A p r o v is io n (Se ctio n 7) re q u irin g the fe d e ra l reserve banks to giv e th e ir member banks immediate c r e d it fo r checks sentby the member banks to the Federal reserve bank f o r c o lle c t io n . For your inform ation on these two p o in ts, herewith the fo llo w in g documents: I am handing you . 1. A memorandum prepared in t h is o ffic e under date of October 5, 1926 (x -4 9 1 9 ) co n tain in g a non -tech n ical statement of the m erits of par clearance; and 2. A memorandum co n ta in in g excerpts from b r ie f s f i l e d in the Supreme Court of the United State s by Honorable Newton D. Baker and Honorable John W. D a v is in two o f the most famous par clearance cases, both on the question of par clearance and on the question of g iv in g immediate c re d it f o r u n co lle cte d checks. VOLUME 225 PAGE 121 Papers attached October 5, 1926. T P F M E R IT S O F P A R C LE A R A N C E . The par clearance of checks by Federal reserve banks is conducted pursuant to the express provisions of the Federal Reserve Act, which have been construed by the Supreme Court of the United States to mean that (1) Federal reserve banks are required by law to receive and collect at war all checks drawn upon member banks of the Federal Reserve System; (2) Federal reserve banks are authorized to receive and collect checks drawn upon nonmember banks, if such checks can be collected at par; (3) Member banks are required by law to remit at par for checks drawn upon themselves and presented to them for payment by Federal reserve banks; (U) If nonmember banks remit at all for checks forwarded to them by Federal reserve banks they must remit at par; and (5) Federal reserve banks are prohibited by law from paying exchange. The above principles are definitely established by the decisions in the cases of American Bank & Trust Co. v. Federal Reserve Bank of Atlanta, 262 U. S. 6^3; Farmers & Merchants Bank v. Federal Reserve Bank of Richmond, 262 U. S. 6 U9 , and Pascagoula National Bank v. Federal Reserve Bank of At lanta, 3 Fed. (2nd) U6 5 , 11 Fed. (2nd) 866 , U6 Sup. Ct. 6 3 7 . Neither the Federal Reserve Board nor the Federal reserve banks, therefore, have any option in the matter and cannot permit banks to deduct exchange when remit ting for checks presented by Federal Reserve banks. TRADITIONAL POLICY OF THE UNITUP STATUS. Then Congress passed the Federal Reserve Act and amendments thereto authorizing Federal reserve banks to collect checks at par, its a.ction was based upon a policy of the United States government ^hich had been thoroughly tested by experience and had been found to be sound, namely, X-U919 -2- the policy of the Government to secure at all times acceptability at par for all forms of money or recognized substitutes therefor. This policy had its inception at the time of the formation of the United States and has been adhered to since that time. Owing to the confusion arising from the various kinds of currency in use and the varying discount at which many of them circulated at the time the Union was formed by the several States, the States surrendered to the United States under the Con stitution the sole right to coin money and to provide a uniform standard of value. By appropriate legislation United States coinage was created and immediately became everywhere acceptable at face value. Again, m 18Sj the confusion that had long prevailed in our bank note-currency, then an important medium of exchange, caused Congress to leg ' e on th- sab.j_ct. One o. the difficulties with this currency was that most notes issued by country banks did not circulate at par because the issu ing banks deducted exchange in paying them when sent for redemption by city barms. The national Bank Acts of IS 6 3 -6 5 cured this difficulty by taxing out of existence notes of the State banks and by creating national bank notes which every national bank was required to receive at par and which 1’ere’ therefore, everywhere accepted at face value. Fifty years later, in 1913 , when the Federal Reserve Act was under - ideration, the --so of checks as a medium of exchange had increased enormously. Indeed, the ease and economy with which funds can be transferred and debts settled by checks has beep a large factor in the rapid growth of American business and banking. Congress, therefore, in establishing a new and country-wide banking organisation followed the traditional policy of the United States and made provisions whereby checks might be paid at par, thereby insuring a wider acceptability for such checks. X-U919 -3Ninety-seven per cent of all Payments in this country are now made with checks and the demands of a small number of hanks in the smaller cities and towns that they he permitted to maintain their "toll gates on the highways of commerce" through the charging of exchange on checks sent them for col lection hy Federal reserve hanks, is diametrically opposed to the national policy of securing the free circulation at mar of all forms of money or recognized substitutes therefor. If heeded, it would greatly discourage the maintenance of deposits in hanks which persist in making such charges. BENEFITS OF PAR CLEARANCE TO THE PUBLIC. The benefits which accrue to business men and to the public general ly under the par clearance system as conducted hy the Federal reserve hanks may be summarized briefly as follows: (1) It enables the business man to get 100 per cent payment of his invoices in the most convenient and expeditious manner. This means that when he receives a $100 check for a $100 invoice he gets $100 for it, not less, (2) It has made the check of the business man, be he mer chant, manufacturer, or farmer, a much more satisfact ory and acceptable means of payment for all purchases, even in distent cities. It has relieved him from having to purchase drafts or carry bank balances at distant planes in order to make distant payments. (3) It has reduced to a minimum the time required to collect checks, thereby making the proceeds of a check available to its owner much sooner than formerly. (U) It results in a much more expeditious handling of checks, thus providing prompt adyice and return of dishonored checks, and minimising the chance of loss through bank failures, EVOLUTION OF THE USE OF CHECKS. In the earlier and more primitive days., commercial transactions were conducted through barter or the exchange of one kind of goods for another. When money came into use it was necessary for a purchaser of goods to transport the money with which to settle his obligations -4- X-4919 to the place of payment or to have it transported by the primitive methods then available. Later, owing to the hazard and expense of the physical shipment of money by an individual, banking institutions undertook, for a consideration, to provide the purchaser of goods with a draft drawn upon a banking institution in a financial center which would be acceptable to the seller of the goods in lieu of cash. To compensate his bank or banker for the expense and hazard of establishing a credit balance in New York or some other financial center the purchaser paid a stipulated sum of money for the draft in addition to its face value. At this stage of banking practice checks were practically worthless as media for settlement of obligations except within the community where the drawee bank was located, because there was no satisfactory means of collecting such checks. Bahks and bankers made some profit from the sale of drafts to be used in payment of debts; but they observed that, in order to avoid the expense of purchasing exchange drafts, the public continued in a large measure to pay its debts in cash, and that this practice caused large amounts of money to be hoarded and not deposited in banks. Banks and bankers also observed that if the use of checks became general they could greatly increase their own deposits and, through the use of checks drawn on banks in other places, could build up balances in such places without the expense of shipping currency. The banks, throughout the country, therefore, under took to encourage the public to deposit its money in banks and to use bank checks in payment of debts. They taught the public that checks of individuals? firms, and corporations could be used as a means of discharging their ob ligations everywhere in a manner convenient to themselves and satisfactory to their creditors. Bank checks, therefore, originated, as instruments - X-4919 5 - designed for the "benefit of "banks; since their use enabled "banks to facilitate their own operations, to escape the cost of currency transfers, and to obtain vast amounts of deposits which had. hitherto been hoarded, Finally, under the encouragement of banks and bankers, the practice developed of using checks upon the local bank in settlement of transactions with non-residents. At first this practice was confined to settlements with residents of nearby communities; but gradually the practice spread until the check became the almost universal medium of settlement, regardless of the distance between the parties to the transaction. At the present time, in this country, 97$ of all payments are made by means of bank checks. ORIGill OF "EXCHANGE CHARGES." ; ; i Up to the time when the use of bank drafts was in most instances abandoned for the use of checks, the cost of the draft was borne by the purchaser of the draft and not by the person to whom it was sent. When checks cane into general use, banking institutions which had formerly secured revenue from the sale of drafts to their customers, reversed the process and deducted so-called "exchange charges" when remitting to out of town banks for checks drawn on themselves. And they did this in spite of the fact that they had the use of their depositor^ money during the additional time when his check was travelling to the payee in a distance place and back to the drawee bank for payment. When a bank receives a general deposit from one of its customers i ■ it receives a loan, either without interest or at a very low rate of interest; and, if the purpose of the deposit is to create or maintain a checking account, the bank, in return for the use of its customer!s money, undertakes to honor checks drawn against such deposit as and when presented. Under the common X-4919 - 6 - law it is obligated to pay such checks in cash when presented at the bank, but not to remit the proceeds to distant place. TThen chocks were sent in through the mails from distant places, therefore, the banks claimed that in remitting the proceeds to such places they performed a service which they were not obligated to perform and that they wore entitled to compen sation therefor. It was for this alleged service that they deducted the so-called "exchange charge•" In the old and more primitive days of bonking there was some justi fication for this charge,because it was sometimes necessary for banks to ship cash in payment of such checks. As the banking business developed, however, this necessity was avoided through the maintenance of accounts in correspondent banks against which drafts could be drawn in payment of such checks. The banks, however, continued to impose exchange charges, attempting to justify this practice on the theory that it was still necessary for the paying bank to incur expense in shipping currency from its vaults to maintain its balance with its correspondent banks. At one time this was soon true, but a moans was/found to avoid this necessity. The rural banks adopted the practice of establishing credit balances in recognized financial centers by depositing drafts on other institutions in which they had credit balances or by sending to the financial center the checks which had come to them on banks in the financial centers or nearly places. The banks in the financial centers became in effect clearing housps for the country banks, and their transactions with the country bgpks were largely, if not wholly, confined to paper items in lieu of currency. 7 X-4919 ri5XCHAIIG-5 CHARGES" NO LONC-SR JUSTIFIED At this stage of the development, practically the only necessity for shipment of currency was between banks in the financial centers, and the cost of these shipments was not charged to the country banks ns such, but was absorbed as part of the operating expense. of the banking institutions in the financial centers. As the practice existed even prior to the passage of the Federal Reserve Act, therefore, the necessity for a country bank to make currency shipments had practically disappeared, and if its operations resulted in its correspondents in financial centers being required to make currency shipments, no part of the expense incurred by such correspondents was charged as such to the country bank* After these improvements and economies were adopted it was actually less expensive for a bank to remit by draft for checks drawn on it than it was to pay such checks in cash over the counter. They were required to maintain less idle cash on hand, and the writing and mailing of remittance drafts involved much less actual labor than the counting out and paying of cash over the counter, especially since a number of checks could be remitted for with a single draft. The exchange charge was, therefore, no longer justified but it still persisted as a sort of petty graft based upon an obsolete practice. * X-4919 - 8 - CHECK COLLECTIONS UNDER FEDERAL RESERVE SYSTEM. Jpon the estaolishnent of the Federal reserve "banks, even the necessity of currency shipments by the barks in financial centers at their own expense was eliminated, for the reason that most of the banking institutions anu. were entitled to make settlement through the Federal reserve bank in their oy means of wnat is known as the Gold Settlement .Fund. This fund was created oy having each Federal reserve bank deposit gold at the Treasury Department in Washington, receiving therefor a book credit to which is debited or the credited at/closo of each day's business, upon telegraphic advice from the federal reserve banks, the net balances due to or from each other Federal reserve bank. By this means the daily transactions between Federal reserve are settled by a mere book transfer of title to gold, without the physical shipment thereof. it is not overstating the fact, therefore, to say that all expense anu. hazard formerly incurred by private banking institutions in remitting to distant points for checks drawn on themselves have been virtually elimi nated. Even the expense of making repittances to the Federal reserve bank / is largely, if not wholly, absorbed by the Federal reserve bank, which furnishes urawee banks with stamped, self-addressed envelopes in which to remit exenange drafts. Where drawee banks elect to remit in cash, rather than by exchange draft, the Federal reserve banks assume all risk and pay all expenses of such shipments. -9- X-4919 LESS EXPENSIVE TO REhlT FOR OUT OJ T07UT CHECKS THAI'! TO PAY CHECKS ACROSS COUNTER. »°t only has the expense of making remittances been eliminated, but, through the centralization of the collecting functions in the Federal reserve banks, certain further economies have been effected. Under the old system each bank received every day numerous cash letters from other banks containing checks on it sent for payment. For each cash letter tne drawee bank had to write a separate remittance draft and mail same to the sending bank. Since the establishment of the Federal Reserve Col lection System practically all of the checks coming to a bank which remits at par come through the Federal reserve bank in a single cash letter and can be paid with a single remittance draft drawn either against funds wnich the oank is required by law to maintain on deposit with the Fed eral reserve bank as reserves or against funds which it maintains with otner banks for other purposes. In this way the actual labor of pay ing chocks received through the mails has been reduced to an absolute minimum and is much less than the labor and expense of paying them in cash across the counter, as the bank contracts to do when it opens a checking account for one of its customers. It is perfectly obvious, therefore, that banks no longer incur expenses or perform valuable services when they remit for checks sent to them through the mails, but they actually discharge their ob ligations to their customers with less labor and less expense to them selves than v/hen they pay such checks across the counter. X-^919 -10- BETTER TO REMIT THROUGH FEDERAL RESERVE SYSTEM THAN THROUGH OTHER CHANNELS. That it is better from the bank’s own standpoint to remit at par through the Federal Reserve System than to r-mit through other channels xias been recognized and frankly admitted by some nonmember country banks which have tried both systems, as appears from letters received by Fed eral reserve banks. One such country bank, having a capital of $30,000 and a surplus of $20,000 and located in a town with a population of 1075 people, wrote to its Federal reserve bank requesting that its name be restored to the par list, saying: Beginning this date, we will par all items on our bank and will ask you to place us on the par list again, as we find the extra trouble we have is worth more* than the exchange we have been getting.” Another small baric with a capita of $25,000 and a surplus of $33,720, and located in a town with a population of 516 people, wrote as follows, to its Federal reserve bank requesting that it again be placed on the par list: "We are again teking up the matter with you in reference to handling at par items received by you drawn on this tank’ in that connection we find that the change we rc.?4_e_hp-S crea,ted quite an additional amount of.work on the_employees of our bank, and in view of thp fo~+. "that our business is rapidly increasing we have decided to par all items sent us by you dpawn or\ this bank, and until further notified by us we will remit at par to you for all items sent us from the Federa.1 Reserve Bark.” Still another small bank with a capital of $25,000 and a surplus $1^,000 and located in ^07n with a population of that it again be placed on the par list says: 500 in requesting I » - 11 - X-4919 '‘P lease p lace us back on the par l i s t . A fter tr y in g out the par p ro p o sitio n and. r e c e iv in g so many cash l e t t e r s from a l l over the country, I think the par system much b e t t e r ,” These l e t t e r s were u n s o lic ite d and were taken from the routine cor respondence o f FederaJ. reserve banks. Further il l u s t r a t i o n s could be produced in great numbers; but the above arc s u ffic ie n t to in d ica te the trend o f enlightened banking thought. m NET PROFIT III EXCHAFGS CHARGES. In order that a p r o f i t might be made out o f exchange charges under the o ld system o f c o lle c t in g checks i t was necessary fo r country banks to avoid the payment o f exchange on checks deposited with them fo r c o l l e c tio n by tn eir custom ers, fo r i f the country bank had to pay exchange on these items tne amount they would have to pay would o f f s e t would c o l l e c t . the amount they Country banks could not o r d in a r ily charge back to a customer exchange charges which they had to pay, because wrhen they en deavored to gain h is account they assured him that he could d ep osit h is checks fo r c o lle c t io n and that the bank would rep la ce them to h is c re d it without any charge fo r making the c o lle c t io n . In order, th e r e fo re , to e f f e c t a system whereby they could charge exchange but v/ould be r e lie v e d from paying exchange, country banks entered into agreements with banks lo c a te d in the fin a n c ia l cen ters under which the country banks were perm itted to charge exchange on a l l checks drawn on them and the banks in the fin a n c ia l cen ter agreed to c o l l e c t a l l checks sent to them by the country banks without charging the country banks exchange. The country banks were able to e f f e c t such an arrangement w ith 4 • - !2 - X-4919 banks in fin a n c ia l cen ters only by agreeing to maintain v/ith th e ir c i t y correspondent balances s u f f i c i e n t ly large to compensate the c i t y banks fo r the fo llo w in g item s: 1. In te r e st allow ed to the country banks on the account. 2 . Exchange paid on the checks c o lle c te d by the c i t y banks. 3 . The actu al expense o f handling the account and c o l l e c t ing the checks. 4 . A p r o f i t s u f ii c i e n t to make the business worth while to the c it y correspondent. It i s very doubtful* th e r e fo r e , whether the country banks ever derived a net, p r o f i t from such an arrangement. The exchange charges appeared as a p r o f i t on th e ir books; but th is was o f f s e t by the lo s s o f the use o f the funds maintained on d ep osit v/ith the c it y correspondent. True, c i t y correspondent p aid in te r e st on th is d ep osit at a low rate - the say 2$ - but by in v estin g or lending th is money themselves the country banks could nave earned much more than the exchange charges p lu s the in te r e s t paid by tne c i t y correspondent. Otherwise there v/ould have been no p r o f i t in the tran saction fo r the c i t y correspondent. CIRCUITOUS ROUTING Aik) DELAY IN 11AKIEG COLLECTIONS] In order to c o lle c t checks which country banks sent them the c it y banks had to pay exchange charges in some in stan ces; but they en deavored by every p o s s ib le means to avoid the payment o f such charges. In endeavoring to avoid the payment o f exchange charges the c i t y barks entered into r e c ip r o c a l r e la tio n s v/ith other banks whereby they rem itted to each other at par without charging exchange; but such re la t io n s were not u n iv ersa l and banks were co n sta n tly g e ttin g checks on 4 » - 13 - X-4919 other banks with which they had no such r e la t io n s . TThen they received such checks tney did not send them d ir e c t to the drawee "banks but sent them to other banks with which they had r e c ip r o c a l r e la t io n s , hoping that such other banks would be able to fin d a means whereby the checks could be c o lle c t e d without the payment o f exchange charges. o f cnecks w ith a l l o f i t s attendant e v i l s , This led to the c ir c u ito u s rou tin g includ ing the r is k and delay re s u ltin g from the fa c t tnat such checks often would f l o a t about the country fo r weeks before they were f i n a l l y presented fo r payment. I t was p a r t ly to elim inate tnese e v ils that Congress authorized Federal reserve banks to in s t i t u t e the Federal reserve check c o lle c t io n system, the b e n e fits o f which have been recognized by the overwhelming m ajority o f banks. I t is not probable that there i s any country bank which de s ir e s to return to the o ld c ir c u ito u s routing o f checks, to the r e s u ltin g delay in tne c o lle c tio n o f checks, and to the n e c e s s ity o f m aintaining la rg e balances with c i t y correspondents in order that i t may not have to pay ex change. I t i s now u n iv e r s a lly recognized by informed country bankers that tnese o ld metnods and d evices o f avoiding the payment o f exchange are more c o s tly to tne country bank than the lo s s o f the amount which i t derives from charging exchange. If, on the other hand, exchange charges were perm itted and cnecks continued to be c o lle c t e d through the Federal reserve banks, a l l oanks would change exchange on checks drawn upon themselves and would be fo rced to pay exenange on cnecks which they receiv e fo r c o lle c t io n . The r e s u lt in general would be that no bank would mpk$ any p r o f i t out o f exchange charges, sin ce the amount a bank would have to pay in exchange charges would approximately balc?nce the amount which i t received from such charges. The oanks might attempt to pass the exchange charges back to th e ir d e p o sito r s; hut i f they did they would soon hear from th e ir de p o s it o r s , who have g r e a tly b e n e fite d by the par c o lle c t io n o f checks and have stro n g ly r e s is te d every attempt to go back to the old p r a c tic e . C O N C L U S I O N . There are in operation in th is country at th e-p resen t time 2 7 , ^ 8 5 banks exclu sive o f mutual savings bank. Out o f th is number 2 3 , 5 2 ^ remit at par and without the deduction o f an exchange charge fo r checks drawn upon them selves. Of the 2 3 ,5^^- banks which now remit a t p ar, lU ,2 0 7 are not members o f the Federal Reserve System and they remit at par v o lu n ta r ily and not under compulsion o f law. This i s ample evidence o f the extent to which enlightened bankers have recognized the advantages o f the Federal Reserve Par C o lle c tio n System. The p r a c tic a l question whether nonmember country banks should charge exchange on checks r e a lly comes to t h is : Do the country banks p re fe r to c lin g to ?n antiquated banking p r a c tic e which seems to pro duce a small revenue, but a c tu a lly r e s u lts in a net operating l o s s , or are they among the forw ard-looking bankers o f the country who recognize that the par clearance system i s e f f i c i e n t , economical and p r o fi t a b le , and fo r the b est in te r e s ts o f the country as a whole? One path lead s backward to the old con d ition s o f chaos, delay and expense in check c lea ra n ces. The other steps along with progress and modern banking con d ition s and provides a means whereby checks, which p la y such a predominant part in paying the accounts and a d ju stin g the balances of the whole country, may be c o lle c te d q u ick ly , s a fe ly and econ om ically, with a r e su lta n t b e n e fit to every user o f checks o f in c a lc u la b le value and a corresponding b e n e fit to banks. c l e a r in g * and i ^ ie d u is cfiB D igt (Sxcerpts from b rie fs f ile d in Suoreme Court o f the United * B- Baker and Messrs. Hollins V. Handolph Bobert S. Parker, Montgomery B, Angel 1 and Aalter Hyatt la ease of * Pascagoula national Bank v . _ ederal Preserve of Atlanta* ) S S RESISUYIYg HISTO&T O f PAH CI&JJiANC*:. Undor the Act as i t o r ig in a lly stood, the fed eral Hsserve fa n v . construed the language o f Section 16 to the e ffe c t that they were re quired to receive checks and d r a fts from member banka a t par, as the equivalent o f a proh ib ition upon them from paying exchange charges or allow ing deduction o f exchange chargee, by drawee banks, upon checks presented through the Federal deserve Bank* Bhe fu rth er language o f sec tio n 16, authorising the fed eral Beserve Board to exercise the functions of a clearin g house fo r the Federal Beserve Banks, and to require such tanks to exercise the functions o f clearin g houses fo r th e ir member banks, were construed to be a d irectio n to e sta b lish a system o f univer s a l par clearance so fa r as the operations o f federal Beserve Banks were concerned* &ven p rior to the enactment o f the Federal Beserve Act clearance a t par had become p ra c tica lly u n iversal throughout the Hew England Dis tr ic t* In the re st o f the country, the incidence o f exchange charges * was casual* Banks had b u ilt up reciprocal arrangements, with one another by private understandings* Banks in the large reserve and cen tral re serve c i t i e s , as a means o f in v itin g the deposit o f country bank reserves undertook to secure par payment o f checks transm itted by regu lar corres pondents* As a consequence, each bank m s associated with some other banka In an e ffo r t to secure par clearance, I s i there vac no u niversal re la tio n and the f a u lt in g practice was that banks or dina r ly routed d ir e c tly only those checks that were drawn upon banks with A ic h they had, by private understanding, a n r “xsyaent arrangement* The bulk o ! chacks drawn upon other banks were routed in d ire c tly , going from one bank to a another, u n til they fin a lly reached bank which had re cip ro ca l par c i« > arrangements both with the bank from which n- o - 1ved 1 c and with the bank noon *hich the check was drawn* Checks deposited in a bank within f i f t y m iles oi the bank upon which the check was drawn would o fte n travel hundreds o f m iles back and fo rth iron one bank to another, to escape snehaage chargee* the e v ils o t th is p ractice are obvious* k large volume oi checks was kept in tr a n s it, w ith m u ltip lied opportuni t ie s fo r lo ss* the rig h ts and e q u itie s o f the drawer and payee, 1 as w ell as the several banks involved, were suspended and confused* An unjust delay was interposed between the re ce ip t of a check and the re c e ip t o f I t s proceeds by the owner, and drawee banks were enabled to have possession sad use o f funds long a fte r the d ep ositors had attempted to withdraw then ad to pay thee to th e ir cred ito rs* 3o fa r as the actu al oaywtent o f exchange charges is concerned, th is roundabout, in d ire c t, private arrangement o fte n avoided th e ir pay■«m t, but I t - • euaber^om*, e o .t ly , both o f b o and t U » . and l»cV *4 uniform ity in i t s ap plication* the Federal Reserve board, accordingly, undertook the us ta b ltafcaaat of a u airera a l par claaraaea *y »ta », baUaTtat, th at to be the mandate o f the law* -3- So fa r as the operations o f member banks were concerned, the statu te compelled th e ir compliance* Member banks con sisted o f a i l na tio n a l banks and such sta te banks and tru st companies as might v o l u n ta rily become members 01 the System* I t eas a m atter of surprise to discover that State banks and tru st companies sere reluctant to become members* This being c a lle d to the atten tion o f Congress, an e ffo r t sa s made to make the in tita tio n more a ttr a c tiv e , and Sect ion 13 was amended, in the p a rticu lars above described, with the express purpose of widening the scope o f the clea rin g house and c o lle c tio n featu res o f the Federal Reserve System, so as to make the services o f the System more a ttr a c ttiv e to sta te banks and tru st companiss, tnus inducing; a larger membership of them in the System and making the c o lle c tio n and clearin g function more u se fu l to the general business o f the coun try* By 1917 there had already grown up in some parts o f the country a d isp o sitio n to r e s is t the attempt of the federal Reserve hanks to make par clearance un iversal* 'Ihe reason fo r that rssistan ce is immaterial* In gen eral, however, i t may be said that many banks had estab lish ed private arrangements which gave them com petitive advantages, which would be lo s t should the par clearance system become universal* Accordingly, when the matter cmw to be considered in Congress in 1917, there i t * * , In both the Senate and House, members who desired so to amend the Act as expressly to authorise exchange charges* This d isp o sitio n was both fo r the purpose o f enabling the country banks to preserve exchange charges as sources o f revenue, and also fh r the purpose o f making membership in the federal deserve System un attractive to State Banks* ® jprotft th is point the matter can be beet follow ed in the de b ates in the Congressional Becord on the Be port o f the Conferees on the b i l l containing the Hardwick Amendment which indicate very c le a rly that both Houses o f Congress f o l l y understood that a rote to approws the Re port o f the Conferees was a wots to rowers# the p o licy incorporated in the o r ig in a l Hardwick Amendment and was a wots against exchange charges and not fo r exchange charges* They also show c le a r ly th at the aaaenufs n t , as fin a lly adopted, was intended to proh ib it making exchange charges on any hheokn c o lle c te d through fed eral Bseerwe Banks regardless o f whether such checks were owned outright by the Federal Reserve Banka or were being c o lle c te d for other banks, pursuant to the enlarged powers then and there a fte r granted to federal Reserve Banks* fe r authority so to use the Jour n a ls o f Congress see Blake v * . national Bank, 90 U* S* 307* fchen the b i l l was f i r s t pending in the House, Congressman feofedden o ffsr sd an amendment, the purpose o f which was to authorise a l l banks, both member and nonmember, to make chargee, coaraooly known as "c o lle c tio n charges’* fo r c o lle c tin g checks drawn on others and a lso char ges, commonly known as "exchange charges'1 fo r rem itting to ou t-of-tow n banks fo r checks drawn on t smselwes. On a point oi order the nouse refused to vote on th is amendment on the to the prin cip al purpose o f the b i ll* round that i t wae not germane In the Senate, howewer, Senator Hardwick offered the sene amendment and succeeded in having i t attached to the b i l l . She House voted to disagree with the Senate amendments and sent the bl 11 to conference. Hr* KcShddea offered a reso lu tio n in stru ctin g the conferees on the part o f the House to "agree in substance" to the Hardwick Amendment* that n otion was adopted by the House, but i t afterward i i -5- developed that many member* o f the House did not *nos fo r shat they sere ▼oting. th is sta g e o f the proceeding President W ilson a d r f r ^ K» * la tte r to Senator Own, who la te r read i t to the (Cong, Bee. Tol 65 p . 3781 ) t "Hy d8ar Senators I hare been a good daal disturbed to learn o f the proposed amendment to the Federal reserve act wmch seems to contemplate charging fed eral reserve banks fo r payment o f checks cleared by them, or charging the payee o f each checks, passing through the amerve banks with a com m ission. I should regard such a provision as most unfortunate and as almost destru ctive of the function o f the Federal r e serve o nics as a clea rin g house fo r member banka, a function . icn trey have performed with so much ben efit to the business o f the country. " I hope moot lin e sr e ly that th is n atter nay be adjusted sith ou t in te rfe rin g with th is indispensable clearin g function o f the banks.1* Sincerely yours, lOODfiOt WILSON.■ i>he cont'9re3$ on the part o f the House were opposed to the Hardn ick Amendment, but under the resolu tio n adopted by tin House they were unable to in s is t that the amendment be strick en o u t. fha conferees on the oart o f both the House and the Senate, th erefo re, agreed to leave the e i. ent in the b i ll xith ce rta in m odifications which they fran l y hoped scald n u llify i t s o rig in a l purposes. A fte r the words "reasonable charges" t <;.> inserted the words "to be determ ine and regulated by the Federal Reserve -o -rd * and at the end o f the amendment they adaed the provision "but no such charges sh a ll be made against the federal Reserve JBnnke." n the conference report was submitted to the House and Senate tneas m odifications of the Hardwick Amendment were the subject o f much b itte r debate, and the conferees were charged with an act o f bad fa ith , end a motion mas made to recommit the b i l l to conference with ins tru e - B o th opposed to nullify its M r. th e lig h t H a rd w th is ra g * 3618 w h ile S e n a te why to d id H ouse n o t knew th a t H ouee, as i f th e e r • !y a c tio n in d ic a te th e d id o f to th e f u ll In th e y ir ,te .. I have n o t th e he v o te an n o t c o n fe re e . w e re t re m a rk . knew th a t d id the Hardwick Amendments th e fro m Con fe e l und er d r o n in g m is lib e r ty ( M r. o * lo n d e ll) c ir c u m s ta n c e s th e h r a s e o lo g y th e e v il o f tim e m o tio n to to la r g e and ;th e r p re s e n t, r e c o m m it th e o u rs ) (Gong. h ec . ?• 3620) and m o tio n . p a r c o U a e tlo n . ■» P » 6 * « to b eet fe e l in e ffe c ts th e s e th e fa c ts , a n t i d o t j . w h ic h ,, w e r o tin * in th a t a t tn e it o n ly in s tr u c tio n s p r e - r r e p o lic y w h ic h th e v o te d n o t <=y S e n a t o r In th e th ro w me o m it th e f e lt o f (Ita lic s th e to o f asked The w as we k n o w le d g e th e th e dow n 55 n° t p r a c tic e w h ile + + + fo r down does p r o v is io n th e i t s e n tir e ly . will re c o rd S w ita e r ) th e th e a p o ly c o rre c t v o te (M r. m e m b e rs h a d i n s t r u c t i o n s . fl fo llo w in g th a t w e ro Totes to re p o rt i f H ouse. o f a re in d e fe n s ib le . r e ta in he was voting to reverse the so g e n tle m a n and w h ic h w ith House B u , is d en e. to w ill H ouse b i ll w as n o t r ta lo n s , th e O h io c o n fe re e * th e do d a *rre e •4 fro m w ith th e we S e n a te » r i changes th a t S e s s io n . c o n fe re n c e s c o re s me h ave c o u ld 1y t d is c a r d by s u g g e s ts c o n fid e n t, th e f ir s t • c o n te m p tu o u s ly 1 d is r e g a r d th e And re fe re n c e s a lto g e th e r , a c t a p p r e h e n s io n , to th e n o t g iv e n d id th e fra n Congressional th e s a id s a n c tio n s tr u c tio n and dll g e n tle m a n we th a t fro m G la s s endm ent p ro p o s e s and C o n g re s s , M r. ago a re a s o n e x tra c ts 8 5 th «3he a O w en a d m it t e d A m endm ent s u b je c t, R e c o rd , On S e n a to r p u rp o s e s . following on g r e s s io n a l and c k o r ig in a l *h a m uch G la s s a p p ro v e kdopted hy th e a762 (C o n « . “ 4 c o n fe re n c e the Senate ehen It a d o p t- H oc. 4621) C le a r “ re p o rt paseed “fe e h e ro n a tio n a l fin a lly s id e r e d , by th e i t f to e n te r fo r i t to o k se d e n t, h e re c le a r a t ie p a r X fe a r lie v e th a t, to d a y , by th is i» l» e good and I th tio n s a g re e d n ie n d o e n t 3 7 6 6 ) o f th e as is as by by c o n fe re n c e ee be th e li t t l e l n fc t h e t la e h im s e lf th e fa c t n o llilie d fo llo w in g th a t he in fir o a naked th e oast M a r a is com e ehen -,ni. I X :ua r * * ir t .» th a t th e th e m o d ific a p u rp o s e re m a rk s v o te d s u rro u n d e x te n t c o n fe re n c e to and X be w h ic h ha« u n d e rs to o d P r e s i n a tio n a l y e t have ie n e to r U r. c o u n try , th e w h ile ih e c o n fe re e s by th e H a r d w ic k , th e fa r to w h ic h w e e n d e a v o r in g c o u n try , y ie ld de (p a g e s a g a in s t fe e o f h ie 3764 and a d o p tio n re p o rt: * l* r . m ust th e to B u t, n a tte r. iia r d w ic k in d ic a te d w e ll to ta n upon Is w h o le th e so to con p r o v id e d lif e > io fit re v e re s S e n a to r n o t c o n d itio n s b e tte r *o fe a t th e th e fr ie n d d id v h ie h c o u n try th in g s ays te a e n title d . lo s s o f had c o n te n tio n to o f th e a ll house l i t t l e th ro u g h o u t m e a s u re , i r a o f b e e t} ie s y s te m , m eans v is e th e y h an ks, cheeks i t la ie c le a r in g g re a t th e s c a tte re d i t le g itim a te ly a f e ile ja th e fro n t a s s e re banka fo r o f agr s e c t io n th a t fe d e ra l re s e rv e th o u g h t os banka d e c id e d as body o r th a t th e re j f ju d g e X an c o u rs e o f h is is to th in k a n y th in g s e n a to r own c o n d u c t c o n c e rn e d o u ts id e th e about X do n o t te s t X b e lie v e le f t in w ent tn ie fro m V e rm o n t th a t, anyone fo r b u t in one am endm ent th is m in u te fe y t h e c o n fe re n c e r e p o r t . 11 is fie d th e w ife th is o r ig in a l b e fo re Is O f c o u rs e no ought re a s o n th e am endm ent e e am endm ent to fe y be he s h o u ld is X me a s u r p r is e d is w illin g to do w illin g so . fro m iia a s a c k u s e tts re p o rte d b e fo re , s a tis fie d M a s s a c h u s e tts l i t t l e S e n a to r end now n o t e v e ry w ife b e , by th e t it th e v o te fo r th e th a t a y ir le n d fe e c o n fe re n c e th e V e rm o n t He r e o r t ; i t th e re fro m re p o rt; (M r. is s a t opposed opooaed S e n a to r c o n fe re n c e fro m fe e k s } c o n fe re e s . S e n a to r c o u rs e , to (h r, b u t i* a g e ) S o . S e n a te w is o h a * le t us a d o p te d w h ic h re a d s see th is as Ih r th e r .. a 1100 * W hen ong enough an d d ra fts ■ ess to r is k re v e rs e is n ta tiv e s m a jo r ity they s h a ll s x a c tly done o f n o t w hat n o n s ia m b e r in M r. hy change w as M r. in * • * * a in v e ry fr ie n d to V e rm o n t r e s is t can g h t c o n fe re e s i t , tn ls h e a rd c la u s e I th e I T h a t w h ile i t th a t is a > ro - X do a t n o t p r o v is io n : ^ th e on any 10 to ta l tim e , d ra fts o . fo r and r e m is * * th o o € h t th e to d H o use, The house m a r g in ; th e S e n a te i f . I b u t e x a c tly n o t am w ith ’ a lW d o f o f a B e p re do deteminad my v o te , such C ong- m ay they a r e s h a t fa v o r i t th a t d o in g , even i f my c o u rs e . • * * I th o u g h t added lik e a t th e re p o rt ftn d end p ro c e n tn th e one and as a e ik iu g th e th e o n ly o f o w o rd . i f i t i t . as » m a te r ia l en d . m o st m a te r ia l c h an g e , th e c o n fe re n c . added any ts o do re a d , th e fro m m a tte r. does w as th is exceed asked an d c e r ta in ly fro m As th a t, th a t o r Id ) The o th e r w is e . n a rro w K n o w in g m eans, o r th is w ith o u t H a r d w ic k . n o t (o ic c o n s tru e d to a t and i t w ay fr a n k ly w o u ld in based « h a lly w ant th e c o n fe re n c e . 3 be checks exchange p o s itio n by o f m e m b e rs M o r r is . to S e c tio n b a n ': case p re s e n te d paym ent ro te , i t no th e re o f, » * * # * « * * w ent to s h a ll its do i t d is tin g u is h e d a th e ir has Lf a o r c o n fe re e s , to They n o th in g a c t fr a c tio n th e re fo r th e T h a t th is c h a rg e s , o r c o lle c tio n s io n o f m em ber o r r e a s o n a b le checks d id . a m e n d m e n t a d d in g s e c tio n h ib itin g p e r th e y fo llo w s : S p r o T id e d o th e r w het I -e re th e have n o t because J u s t fo r S e n a to r 1 q u o te d , th e fa c t e v id e n tly • tat no each chargee »hall serve Banks." t* a*alnst P,d*ral *•" ths y>9t. destroys the w hole amenuaentL and the President’ s letter proves that it was intended to destroy the stole business, and that it will h e he construed so as to destroy the amendment* because he says, sees not went any am endm ent allowing a commission to ,be charged, tto payee o f such checks naesln^ through the federal ^sorye "M r. O w en. H r. th e S e n a to r to w as w r itte n b e fo re la n g u a g e th e w h ic h th e w ae about “H r . m eans th e th a t, it i t lik e to see S e n a te oug ht d e n t 's i . o n ly to p o c k e t, th e n w a n te d , •x c h a n « o on w e re w h ile g iv e n g iv e n to th e th e and to o f t la t th a t i t th e c h a r g in g ite m s . says I t i t , and be g iv e n I w h ic h th e S o s a tc r p la in * a U th a t w > . th e n o t h a re fe d e ra l b u t th in k , th a t th e y « c t ly " ( It a lic . th e * to in i t , t h l. tn a t i t i t o f th e b ro u g h t to a l» o th ro u 4 » th e y in -r e s i a a ,th a t o b je c t w h ic h n o t I tr ie in • » ! » * * . . out b a n k ., n o t tu ir u . * T i.w h a . .h a ll w hat does P r e s id e n t '. re e e rre o a .s ln g la n g u a g e c o n s tr u c tio n to y e t checks , , a , . k . ? r t > lc h o o o p llih . Tes; eo , th e a tte n tio n s h o w in g o n ly th e fo rc e th e y o f w ith do le tte r th e m e t, r e la te d banks to .e r fw e tly th a t c o n fe re n c e added H a r d w ic k . p o u r c a ll le tte r , >ayee. s h o u ld i t . I of t o e d a te F e d e ra l re s e rv e n o th in g i t P r e s id e n t, th e i . o f none haw s th e S o a o ra l d id n o t w ant n o t th e . tm s r o g e r ^ ? ,.. to — o u r » .) th. fact that Senator Hardwick r«sognl*ed that the bill ae agreed upon by the confers, would prtablt wxchange charge on chuck, collected b, tad*ralta..rr. Bonk. a . N5«*» io* othera *’ ’ *11 th0M 0™ed b , the wwderal Bee.™ Baric, ttuen-low. i . further indicated by th. fact that he tried to taw. the Senate aeend the 8U.e rtowiwo to read m e follows! "B u t tta y a .id no y e d e r il b r such c h a rg e r e M r T . th e m . * s h a ll b a L ., to s i. be a g a in s t a b .o r b e d o r f ln a ia ; Ob page 3767 maid: he • * • • If vd ask th e end o f i t , th is i t , le a v in g w ill oug ht no fie s e r v e p a id th e m have th is to accept *S o am endm ent th a t i f o u t w ill w ee in te n d e d th a t and th e a c tio n s to th e upon i t h ill and a t th e th e y re p o rte d ought be m ade a g a in s t a b s o rb e d o r to have w ant is to th e fin a lly i t and m e re - th e th e is s e th a t w as b u t bank, th e drawn, as fre e th e lik e tr .e y to w henever as ch eck w as w ith o u t o f do in th e o f fo r a w hat le f t w o u ld b ill i t and p u r* * 3771) and re p o rt fo r r e m itta n c e s , tra n s p re s e n te d c o lle c tio n m em ber (o a g e s m em ber b an ks B o a r d ,in w as b o th u n d e r s ta n d in g th e © iia r g e s r e q u ir e d th e to i t (p a g e check ag en t account w ay B e s e rv e a use d s fe a t d is tin c t m ake to to C o m m itte e passed, th e i t m ean n o th in g , d e fe a te d th e th a t th is w r ite a p p e a rs M eans F e d e ra l w h e th e r re s e rv e le a v e th a t w ith 13, S e c tio n b e tte r C o n fe re n c e b i ll, see pay th e y re m n a n t y e t p ro p o s a l w as by th e and w ill i f n o t s o m e th in g p r e s c r ib e d o f th e i t « a » ,a to n o t am endm ent an d th e n o e r fe c tly . th is we h u t and be s h a ll p o c k e t, h ill; s o m e th in g -m a s s e d p e o p le e n tir e ly a c c e n te d c ir c u m s ta n c e s , w h ic h th is d e s tro y H a r d w ic k R e s e rv e c r e d it we th o s e S e n a te ; to m ean and In te r be own w hat am endm ent F e d e ra l th e s e o f C o n g re s s lim its s n a il to th e ir out nonm sm bsr b an ks w ith in a to new 3621, 3771) a rg e th e m s e lv e s to th e g h o tt o f lik e banks in to i t th e S h is H ouses o f w ip e p o rts c lik e a ll o f la n g u a g e to p o s itio n , th is • re s e rv e exchange th e on th in g B anks, - d o u b le -r iv e te d be th is th a t pot it » “ F e d e ra l th a t ta k e - such F e d e ra l by w ill c o n fe re e s to la n g u a g e »B u t Ve s e n a te th e s e bank, o r fo r u n d er to be p a id by d e d u c tio n o f exchange th ro u g h th e d e p o s it any ot bank c h a r ts . -11- She a ll checks th o s e o f C o n g re s s p re s e n te d by th e p re s e n te d fa c t th a t m eat w as to im in te n t 5 G r. h a v in g th e th e p a r tly c a llin g to $ 1 ,0 0 0 ,0 0 0 pay w o u ld m ent be g o v e rn m e n t th e in d u c e d G la s s , d e p o s ito r s o f such th e by fe a e r& l Be s e rv e hanks a as o w n e rs , exchange by lo a n s . th e U n ite d in such banks, checks th a n to to c o lle c t fro m th e in Checks o f th e m o th fo r r o f banks w ith as r e g u la r , in acco u n t th e o f th e 4 u :e n d h o a rd g o v e rn m e n t s u b s c r ib e r s in te r e s t th e th e c o n n e c tio n th e by d e s e rv e o f upon m e r e ly J a r d w ic k fe d e ra l R e s e rv e one n ot sheen th e .x v ib ilit y fe d e ra l no th e to c h a .g e s and fa rth e r c h a rg e s S ta te s , w ith Is am enam ent le tte r a tte n tio n L ib e r ty th e exchange G e tr a itte e c o lle c te d o f e x c lu d e backs C o n fe re n c e s u b s c r ip tie n s to bonds by to to th y th e s e ag en t fo r a u th o r is e d p ro c e e d s th e g o v e rn *.CTXG**L aHOil *ai? S A&*„I ITSY Ii- . XX-iT£ ?h* 0 '3-jDIT «wit;and* th*t fcfe* <g***«tioii of the sound* **** ** orodit And availability for cfcsek* iopositod in th® rostrv* aocourat® of ..v®»bor h*rikm it wholly irreleraart to any is^u® In thi« oase. * On fh « contrary, It 1® * well *®tu Hahod rule of itatu- tory construction that. *****& • J*Mrt ' to b# >r*a*9*d that th® UgisUt^re ^ o®i3«fi-ia oo^struo* ^ thsir design io aacura or ^ . M ^ r9a“ ‘1* u ? f w e h M w i U • ■ W J t a o o * . hardship. or public in ju ries.* (aiaek, Inter pretation of tans, p . Is o .) 2 2 2 f t I f . therefore, the statute i» a eaaphibla of fa* oo.-.utructiona it should a . fiivan that which i« io aoeortfanse with aound aoonaaia policies and which w ill be beneficial rather t l* a hantfal to the public, and i f tha oonotruction oony*nd«i for by tha p la in tiff would bo twraful to tUo public i t la a p p r o p r ia te fo r d e fe n d a n t to p o in t this out to tha gourt. A. oo«pr»:ianairo reading «f tha faioral ueeerro * * that » U of ita provisions », Wnoniaed around tha control thoughts of real reserves and a sound and elastic Surronoy. to— a m t •f m *sr banks MS* bs "actual oat balance,,* nothing more or vs# will satisfy tha safe. Sut gives an "aatuaX not balance” to the oradit of a asnber bank, tha rwaber basic la a-Ahoriaed to check again* this balcnoa a. fr e e ly as it Ui^.j, only that in tha event such 'actual net balance” lalXa bale* tha re aerva requirements, pregreaeively heavier ponaitiaa are i» *2~ po««d and tio n a l s m is b e r b a l e s le a n t o r pay any y a lm s t e ra l F e is r v * a re in g o ld th e y a re a lto le s t th a n . 4 Q £ e u l a t i ~a# tiv e ly * U n ite d o f th e a r is e lo * * 4 S a * o f o f b a la a e e s im p o s e d a th e ir oa th e th e o o ll th e th e B ut o f o f aod p ap er o r la Fed 3 fi# » g o ld o f a c tu a l o n ly 40^ by s o t a ir - re s p e c F e d e ra l S s - r e d is p ttr e im s ln g h e o tio n s o f m ln fc a in o f ia la fa r .d e it s i f r e q u ir e d R e s e rv e cash fo r th s 1 3 , 1 3 (a ) as p a rt ne w ber banks B eaks, i n t a c t io n * Banks th e upon aad r e q u ir e m e n t Banks th e b u rd e n lim ite d s e o u r ity * fo r e n title d th e ir th u s is o *a t r e f e r r in g o f s a r r y la g to th e o p e ra count p r e s c r ib e d p la in t if f and le a v in g c u rre n t to th e a c tu a l re s e rv e a re as e q u iv a le n t, m a in ta in e d * re s o u rs e a a f it s th e is re s e rv e bunks o f based b iv a le n t a v a ila b le n sn b er o r p o lie y la w fu l s o n s y R e s e rv e by b a la n c e s F e d e ra l R e s e rv e checks F e d e ra l F e d e ra l e x te n t n o te s th e to la w f u l n o n © /, lis te d o f re s e rv e o r aad s a in in g c te d k in d re s e rv e a c t u a l M in in a s n e e d e d tio n s # o r 16 re s e rv e s a v a ila b le d e p o s it cash o ld r g o ld e x is te n c e b a la n c e s th e re s e rv e s e c u r itie s sound la So,. la th e S e c tio n to a d d i A e t* o a t s y s te m o f by ^ tro ta ttg o i p a r tic u la r c la s t 0 tu e fc ii^ tc a s fc e re s e rv e m a in ta in a g a in s t t h e i r deyond th e to to d u r in g l a w f u l ra o n e y d t l « S i s a u s fc b e c o u n tin g th e s e r e q u ir e d r e q u ir e d B a a <m s a p l o y s e rv e U o r fo r b id d e n d iv id e n d s d e fic ie n c y . re s u rT *c bs a r t »uoh Saaks * u a re s e rv e s c o n te n d s to th « v ith s h o u ld th e " flo a t* 0 it would moan, that the sound reserve policy of the A«t would bo abrogated, and th*t th# ultimate reserves against the country*# bank deposits would contain a largo eoliwe of cheeks of unprowad aoundrws and doubtful liquidity. Required reserve balances of all ^ O o r b*nks against th ir deposits are on the average about 10 par cant of their aggravate dooocit liabilities. eihafc this aaans is that whan a parson deposits |KX> in his bank, th# bank wust keep $10 of this amount on deposit at the reserve bank as reserves against the $100 deposit, and is fraa to loan or iiswaet the regaining $30. The reserve bank in turn on receiving the *10 must keep $£.&0 of it in cash as reserve against the ^10 deposit and is free to extend additional credit on the reaaini&g *6»6Q. Vhus the actual cash reservas required to ba maintained against a bank deposit of >100 anooflfcto only $3.50« fhis very low percentage of reserve 1« adequate because re serves of eateer banks haws been concentrated at the reserve banks and thus hare bean isade vary *a*oh more efficient, and because the remitting $6.bQ in tl;o possession of toe reserve banks oan be invested only in paper and securities whose soundness a M liquidity is scrupulously provided for by Congress. then it reduced the actual cash required to be held back of deposits to the vary lew level of $3.«0 per ^100, engross relied upon the fact that the remitting funds entrusted to the reserve banks would be kept not only in a sound but also in an ixtreswly liquid position, and would in fact bo oonve tibia into each at paotleaily any tissa. To introduce into this very carefully guarded field of reserve bank assets a large volume of uncollected ebooks of untested validity, would reduce the reserves below the point of safety as detenaia d by Congress* Unoo'i looted ebooks are considerably more than one- fourth as large in volume as the total of number V n V re serve balances, sothat the counting of uncollected oheoks as reserves would reduce the masfeer banks9 actual col lected balances by more than 26 per cent. With our re quired bank reserves reduced to the low st possible mini* » # it is a matter of the g oatest public importance to keep these reserves absolutely inviolate. The K*d m l 2 userve System has by no means super seded inter-bank collection relations. * vast volume, both in number of cheeks and in amount of money represented by than, is oleered daily by direct correspondence of banks. The rale here contended for would convert every check in the country into currency upon its acre presentation to a Federal Eoserve Sank and the "float* now existing would be increased probably assy fold. The taking over of the "floatn by the reserve baa&s, as contended for by the plaintiff, would be an inducement to member to relax their efforts in reducing the — Vnas of float and to send to the Reserve Banks a large volume of checks which are now collected through other ohannels} with the consequence that the Reserve Basks would have to give credit in the member banks9 reserve accounts not merely for trie $500 ,00.,000 of float now in existence, but for a mooli. larger amount* In affect every Federal lieserve Bank vould be requi od to cash all chocks on mooter banks# wherever located# without ary opisortunity to as certain whether or not they arc genuine and drawn against sufficient funds in a sound ami solvent bonk# Let us get clearly in mind Just what the plaintiff seeks to have established as a mandatory rule upon the Federal Reserve Banks# -it is that each Federal Reserve Baxdc shall receive every check or draft tend rod to it which is drawn on any of its depositors as though it wore cur rency# pass the r w t of a l l such oh cks at onoe upon thoir receipt to the credit of the reserve aooouats of me©bor banks# and make such credit immediately available for withdrawal in oaah or# shat is nore 1 portant# iiaaediately available as legal reserves of the member bonks which may be used as the basis for the extension, of addi tional credit in an amount equal to <v proarimately ten times j t h n amount of such reserve* Obviously# In a country like ours# of vast territorial extent and with business re lations established fro© and to all parts# so that the major part of the business of eucU day Is done by oheoks# and those Oheoks go by nail across the continent and must recro:a it for collection# a very substantial part of the oheoks outstanding at any particular rwmencfc represents funds nundroa or thousands of miles away fire© the place where they net be finally brought to accomplish the pay ment for th oh the oheoks were given* The tiiae factor in « • eeU eetiea a f ebooks v a ries tn m hears to dajm, n w toe ewtfteat moom or tantsoportokian too uaad. and « m « r t diraet relation* eetabtiahed Tirta»>ii th e *.»*■ o f dop a lt by too pay • and toe Trimi i i>—1>, tto aoooy «r credit toieh to to pay U 1 toes* ’float. U g “ sheets to In varitos tonka, prvyerly to too sredlt «# too pereone tod deposited to there, earning interest on dally bill ■too a* available for to* too of too b o w s holding it* eabjeet to to etthdraoe bgr tooaka toito toaaa in “float’ and subject to equities on behalf of toe bank against t . dope alter, Seearto it la not in toe toots of toe took or available to It far any use It baa beoa aetuaily oo Hooted. Tan tola great l|[r ipn« Mn to by tola proper sought to to doubled by too aroatien - * fto titlt o * eqiivalaat. credited and a d * .m lla b le as td e n i eato by toe iiaoareo Banks. Tba aaft raoalt — nld bo. to substantial a ffo e t. that a^r ttoa anybody in too Halted atatoe danoeltod -1th a a— . neretol bank a ohaafc. salable at a point *.«ra there ia SU *Si3£ of bank eauld a /ad ral deserve dank, a toaaaal «*sorv» m k» a loan to the anawnt o f that a*.— . , -« * k- eto any opportunity to eeeerteto toother i t U . in fn a t. doanlaoly dram eaaiaot funds in e solvent bank, and elttwwt any in areet on toe la n far f -- ” rtaalpt of the ahaok pad the o >lteatlen of - — m n , tae uroaaeda. into a nee o f reeerm bank funds eeaU be eaatrwy to the to tte r, the a p ir lt. ead toe purpose o f toe fed sm l t o . serve Mr loh thi*oeghoefc shews th© solicityd® of* Con* g r * 9 B for safety# n o M a m * * , and licjidity of the mpor securities aoquired by the reserve bank*. osr The foods avail able for investment by the reserve banks are the ultimate banking reserves of the country# upon which rests the safety of the deposits of all oo«>er©ial banks# it is a saered trust placed upon the reserve banks by congress to protect the reserves of em b e r ban^s# so that the deposits of the peo >le at their beaks m y be available vAutn the oeoaslon arises to use then# To invest fwxds of this char* aster# the reserves of the nations banks# in obeoks# whose soundness has to no m y been tested and whose collection m y require an indefinite amort* of tine# would bo at variance with tho purpose of the Federal Reserve f*ot# and contrary to the public interest# tot only would the counting of checks in proooss of collection as reserves introduce an el*nest of uncertainty and speciousness in o the reserves held by mmabmr banks against the people** money deposited with the* but it would also bring, about a danger of credit inflation# It is difficult to describe in any oonoise my# the effects growing out of the coemption of the *500#QQQ#000 by the Federal Reserr Banka# oouree# would be that float The imiodiate rffect of th is enonaoue sun would be carried to the reserve accounts of the awetoer banks# thus placing those accounts greatly in exoess of the reserve r© wired - c • for their then existing de «slt liabilities. So*. In these elrcunl t U M i wlut would happen t Theoretically, there are a askar of po&sibilltiesi 1 . tho baaks Hd^at ilthdrn tbs a s w i t in excess of their legal reserwe requirement* la geld er currency; or 2. They might use some or all of the excess rsoervsn to pay off rediscounts. If they happen to owe any; or 3 . Shay might leave the entire amount to their credit ae reserve ana use It as the oasis for additional credit expansion. _ * 1 1 1 be shown below in some detail, the last alternative 1 , the one that would be most profitable to them. To withdraw the amount in gold or currency would wlnply place them in the possession of idle cash for which thwre would be no demand and which would earn them no interest; to pay off their rediscounts would be to use the credit only o*ce. that le. dollar for dollar; but to L a v e it on deposit ee reserves eith the federal deserve Banks and use it as the heals for additional credit expansion would suable them to employ at a profit approximately ten times the amount. A Biinrrt ml bank le e business enterprise conducted for prefit and its board of dlroctor. is under obligation to the stockholders to keep Its available funds profitably invested. Com mercial banks, therefore, do not keep idle funds on hand so long aa they have the opportunity of lending these funds or of making inre.tamat. tb* pru‘“ "“ * ***" " * b o fobliged to k*«p * ederal « « * r » •*»*** “ *• , _ h s M W a lly r soul rad r e » e r *©• l a * orm remount of faad* Idle: (1) ** legally r»u ., ... ^of t»ala»ees rltfe «*• * ^ t ,; , e r .i N M n * W * k « . « 4 day-to-daj r e q u i r e s of cuotom.ro. ( * ) •• t o vauU Th. P*oi-rtio» of re..rv«. that member book* ar. required bjr le« to bold a.>ln»t their * » . « * • vari.. for differ.*! cle.«. of citie. and out ela.ee. of deVito. * * « «" ** ’" “ required re..rv.. are about 10 per cent of td. member bom*.' ~ b i„ 4 liabilities o* d ^ a*d time depooito. f » t-Portio* of caeb to be carried i* vault 1 . left to th. di.er.tio* of the « t h r i v e . . and e* tb. . ^ p m m u thalr 0 »a m * * w for all t of , t „ , , o8 uot count vaulta do*s th i. ca.b do»n ao 1*6*1 r.e.rr.. under th . la* t b . bank, endeavor to « « P to t b . - l n i « m n . 0. . ^ dn__ o f th e ir customer*, to » . t at th. reserve banka and mit lo w e s t tb . th . hanking .t m t i .t i c s show i that both « U M . . of unproductive fund.. l.«*l — entlp at the — * * * * * * * * * * * ' » d i . unproductive o f ^ “ ^ baiane.. * 14i“*** r“ *in level that th. 1 *. and banking prud.*ce per M W fund. idl. that could legitimately c l o y e d in a p r o f i U b l . &BXk\ \sy a c o B » * r c l a l batit# — * - — and «af*l. u Under the** circumstances, anjf eimage in the lav or t h e regulations t h a t would hare the effect of adding to the existing reserves of aeaber ban&s, would lead to increased extension of credit by tba&e banks* for the purpose of em ploying these surplus reserves# The addition of ^5CC»0C'y'»000 of uncollected ehecks to the reserve balances of isenber banks, as is proposed by the plaintiff, would result, as the banks used these additional funds, in a large growth in the aggregate volume of bank credit in use. This growth la\ the amount of credit in use would not arise out of an increase in the credit requirements of trade and industry, but out of an arbitrary change in legal requireasents. Such a growth in credit, without a corresponding growth In business activity, constitutes in flation. in addition of $5.^0,000,000 to the reserve balances of somber banks will tend inevitably to increase the volume of bank credit la use by several times this amount. The reason for this is that as the banks use the additional funds in great l y loans or purchasing investments, most of the borrowers or sellers will leave the proceeds of the transactioa on deposit with their ban.<, so that the net result will be a growth in depoiiti, without a withdrawal of funds from the banks taken as a whole. j»i a growth in deposits, as was pointed out above, in creases reserve requirements of member banks by only about onetenth of the amount added to deposits, so that a growth in op posite of $500,000,000 will tie up as reserves oaly about $50,000,000, leaving an additional ;«480,000,000 at the disposal of araber banks. Xa the absence of an increased demand for currency accoatpaajriag this growth in deposits the banks will be in a position to increase their leans end investments by about 5*000,000.000 before the entire addition to their reserve funds will have been absorbed. in member bank, credit on the basis of * In practice the growth 500,000,000 added to their reserve funds is net lively to be as large as 15,000,000,000, be cause experience shows that a large growth in deposits Is ultimate ly followed by a growth in the demand for currency. \s customers of member banks would begin to withdraw a pert of their deposits in cash the bauks would have to use aWcrrespondUg proportion of their funds to meet tills dei^aad, and tneir surplus reserve balances available for a ten-f Id extension of credit would thus be diminished. The extent of the growth in the currency demand brought about by a growth of $600,000,000 In member bank reserve balances would depend on the prevailing business situation. Under our banking system and with the banking habits of our people such as they are, the volume of actual cash outside of the lederal reserve banks continually ad justs itself to the public*s requireaients, at the prevailing level of prices, for pocket and till money and to the v o Iubmi of payrolls of industrial and commercial enterprises. Since the credit arising from the counting of uncollected checks as reserves will have been brought about by a change la interpretation of law and not by an in- creased demand for credit throng a growth in the country’s in dustry and trade, it would not be likely to be accompanied im mediately by a large growth in the demand for currency» and a large part of the addition of 500,000,000 to the reserves of member barics would Aontiuue to be available as reserves, which under the law are capable of supporting a ten-fold growth in deposits. The ex tent of growth in bank credit that would result from an addition of $500,000,000 to bank reserves, unrelated to a growth in commercial credit demand, cannot be predicted with precision, but it is cer tain from past experiences, such as gold imports, that such an ad dition to bank reserves, even when considering the resulting in crease in the demand for currency, will lead to a growth in the total volume of bank credit of several times that amount. Such a growth in credit would be pure inflation and an artificial disturbance to the course of business. / The economic ills of credit inflation are too well known to need extended comment. Prices and the cost of living advance unaer the stimulus of inflation, and this results in a grave social injustice in that the real wages of the laboring man are reduced through the reduction in the purchasing power of his money. wages buys less bread and meat. A. day’s Moreover, the bases upon which the industrial and commercial business of the country is done are immediately altered. The process of credit inflation, by its - 13 - very nature , induces and encourages speculation. Unsound business ventures flourish when banks are eager to u^ak* not loans and their eagerness is induced/by noxsaal and proper business demands, bat by the fact that their reserve posi tion has been abnormally enlarged and they are in a posi tion to make profits by expanding credit. It is iVincUnaentally unsound that the banks should thus be tempted to encourage credit inflation by creating for then reserves which are* in fact, fictitious - built up in whole or in large part by the crediting of unrealized funds* and not based on gold* lawful money, or the equivalent in actually collected funds* loroover, the financial history of the United Jtates* prior to the passage of the ederal leserve ;xt, shows that exactly this kind of unregulated credit inflation was an evil influence cousin*; depressions, crises and panics. It is, therefore, inconceivable that after the exhaustive studies which revealed the causes of our financial in stability after twenty years of legislative effort to remedy these causes resulting in the lederal heservw ct, aimed directly at them, the court should now reverse the Federal Reserve Act upon itself and through its decision place the reserve banks in a position of being factors in increasing rather than moderating the fluctuations in the course of business* - } 3 o t h ills to im p o s e a c o u ld w h o le s o m e r e q u ir e m e n t th a t e v id e n c e t h is * by th e o f hanky ch eeks, o© m o re w o u ld g iv e th e th e e x p a n s io n e n t ir e ly beyond th e w o u ld c o n tra ry be fe d e ra l re s e rv e e x p a n s io n and to s im p le beyond % s te m c o n t r a c t io n th e in t e n t io n fo r th e In e w h ic h to needs fe d e ra l o f e v o lu m e • b a la n c e s c o u ld o f o f • be in t e n d e d b r in k o f ab o u t o u r R e s e rv e in • is one u n c o lle c t e d an b u s in e s s S y s te m , c r e a tin g p r e v e n t in g baa£ ^he in c r e a s e d d e p o s it in g C o n g re s s p u rp o s e th e o f G o n /.r e s s in fla t io n , a c tu a l n e t pow er th e th a t c r e d it p ro c e s s th e c o n tro l o f th e be b a la n c e s banks c r e d it th a n upon s h a ll re s e rv e th ro u g h c e r ta in r e g u la tio n re s e rv e s 14 - lif e f h is th e e x c e s s iv e c r e d it * and Xt Is obvious that the credit to the reserve account of tha petitioner of all checks taken tr m It for ueposit tho federal eeerve i&ak, unuer condition* which mould render such Cheek immediately avalla.la as easht mould result practically In a situation share the reserve balance of the peti tioner might consist in large part, or even in whole, or uncollect ed checks. Although so shall not consider the economic aspects of the question, it should be pointed out to the Court that this situ ation would constitute a positive violation of section 19 of the Fed eral Reserve let which, as now amended, reade in part as follows: »&ve*y bank, banking association, or trust cobh > P**y which is or which deceases a member of any Fsderal reserve bank shall establish and maintain reserve balances with its Federal reserve bank ae follows: *(a) If not in a reserve or central reserve city, * * * it shall hola and maintain with the Federal Beserve bank of its district an actual net balaaoc equal to net less than seven per centum of the ag gregate amount of its demand deposits and three per centum of its time deposits. * (Italics supplied.) words “actual net balance* were put into the Act by the amendment of June 21, 191?, (40 frtat. 552), and are designed to exe cute one of the primary and fundamental purposes of the Federal serve i»et, namely the creation of real reserves as contrasted with the fictitious reserves which constituted one of the perilous weak nesses of the old system. It is manifest that a balance made up, in whole or in part, of items in transit, or in process of collection, would be neither - 2 - actual nor net within the meaning of the statute, and that the demand* of the/petitioner, If acceded to, would be destructive of the reserve regalresents which Congress has deposed upon all number banks, fhe Act of 1917 is, of course, later in point of time than the original feder al Reserve Act, in which was embodied section 16, which has never i>een amended, Lection Ihile we see 19 210 conflict of any kind between Section 16 and as now amended, were there any such conflict between the re quirement for credit at par of checks and drafts, etc,, and the requlraaent for the maintenance by member banks of "actual net balances" for re serve purposes, the later enactment would prevail, 11 th regard to this amendment it is important to note that Congress, in making it, responded to a recommendation of the Federal Re serve J3oard which in express terms stated that these words "actual* and "net" would require each bank to Hc&rry its own float, 'or this reason, since the "reserves" would all be collected balances, the } ederal Reserve Board further recommended a reduction in the amount of reserves to be re tired, The* legislative history of the kaendment of June 21, 1917, s on that Congress acted with exactly this understanding and purpose, (Third usual JBeport of the federal Heserve Board, 1916, pp, 22-29; federal re serve lullstin, February 1917, pp. 99 end 104, Congressional Record 65th Congress, 1st Session. M » 55. iUrt 2, page 1588). Se thus have a long and consistent administrative interpretation of this language which would be persuasive with the Court. United states v. . 11 road Compear. 142 «,$. 615-621. Ireat outh$£& Scnell'e xecutor v, | 138 C,S« 519*572. Ve have the language in question actually suggested by \ the iederal Reserve meeker \miks Congress to board for the express carry their own float, purpose of and requiring the tbo language adopted by the and enacteu after a debate shoving that it not only desired to effect this purpose but made a reduction in the amount of reserve required to be carried, because of the fact that when the reserve con sisted entirely of collected items less reserve would be necessary f e n under the practice of counting as a part of the reserve uncol lected items in process of collection. ?urther it should be observed that the eder&l Reserve Act imposes rigid limitations upon the investment, by federal de serve iSonks, of their funds, (lee federal Reserve :>ct, 13, 13a, 14.) fo require the Jwderal eserve banks to boy the great volume of oheeks floating about the country in the process of collection, or any substantial part of the®, would obviously violate these limitations and defeat their purpose by requiring the federal ra&erve hanks to invest their funds in "uncollected items," a font of investment not authorised and in compatible with the kinds of investment which are prescribed. This suggestion made by counsel for petitioner (Brief pp. 36 and 37) that member banks be permitted to have two accounts, one consisting of uncollected items lenediately available to check and the other the reserve account consisting only of an actual net balance of collected items# obvious ly does not advance the argument. Such a bank would immediately check out of its float account and into Its reserve account, and its reserve account would thus rest upon the seme uncollected items and be neither actual nor net. sxc& ipts fhom m is F w bohoia ia jag iuvis American Bank and Trust Company T# F ederal Reserve Bask of Atlanta Sene tins in dime, 1916* the Federal Reserve Board at Washington* la accordance with the directions contained in the pro* visions of the Federal Reserve act • • • ♦ e inaugurated a policy of universal par clearance of cheeks* that is* it directed the several Federal Reserve Banks to act as clearing houses for their oenbsr banks and to undertake the oolleetion at par of all cheeks received for oolleetion (»•* 76* 211)* The polioy of universal par clearance was inaugur ted by the Federal reserve Board at aahingfcon* but the methods by which the plan was to be carried into effect in each dlstrictwere left entirely to the respective federal deserve Sank of that district (a** 205*209*296*301)* * • * ♦ * The Attitude of Plaintiffs* The re a l r e lu c ta n c e c h a rg e s on (it.* a ll A nnor w ith no re a s o n th e fo r p a rt to p la in t if f r e t a in o f ille g a l a c ts on th e o th e r p u rp o s e th a n so to p la in t if f s m ay b e The p la in t if f s have in s t it u t io n o f th e In o r d e r 9 3 )/ th e e le c t e d th e to s ta n d on p e r m it t e d , t o r fu s e d t h e ir t h is banks t h is p a rt t ie o f o f th e s u it to fo re g o re v e n u e * th e to a g re e to b a re le g a l r ig h t s , o f to r e m it th e y d e fe n d a n t hands e o n ix m e is th e e x a c t by b n a il r in g th e th e esachun have bank* c h a rg e d a p p a r e n t ly d e fe n d a n t exchange a t par ta k e n e bank th a t c h a rg e s * and th a t have p o s it io n * A they now complain that the Federal Keservs Beak ofI fAtlanta intend* to show then no consideration but to go the Halt in collecting chock* across the oounter in ordsr to do then out of a few dollars a year* On the contrary, the evidenoe discloses that the Federal d serve hank of Atlanta has in the past, and proposes in the future, to show then every considera tion and even now is prepared to glee then the alternative of paying In exchange at par or in eash, rather than stand on its own bare s legal rights as bolder of cheeks payable on presentation and demand. cash only, a stadium wh oh along can discharge the obli gation arising out of a negotiable instrunerrt* In the last analysis, this is what the etldenoe of record discloses* It is admitted t hat the exchange charges are borne by the ultimate consumer, the people at large (ii*, 10 2 ) • Nevertheless, the plain tiffs Insist upon the right to retain such oharges in nmoh the same way as the spinners of old clung to their alleged right to employ* went when the cotton gin first oams into eing* It is a policy of obstruction, purs and sir.pl*s an attempt to exact a charge for a service which in reality is no longer rendered, as shown by numerous letters written by Governor Harding and introduced in evi dence by the plaintiffs themselves* (See particularly letter to a United States Senator, dated -april 1, 1920, &*, 122*) * * * * * * * * the dictates of sound banking require that If the several Federal Reserve Banks, in undertaking the collection of oheoks payable on presentation at par* are to render satisfactory and >— *wmimw.wi wnmum Ifa*—— g—m gmmm efficient service to their tu r n e r hanks* they must be ggwpared to accept for collection and to ooUoot at par any and all checks deposited with then ro. ^collection* Haring the necessary authority* it is of course open to the Federal iieserve banks to exorcise such authority at will* There are* ho ever* cogent confidentlions of policy which impel the Federal hoservo dank* to undertake the universal par collection of cheeks* In the United Stat-s* the uee of the check as a medium of exchange* both locally and at distant points* has gr wn enormously In recent years on account of its convenience and safety in settling business transactions* By the uee of the check* debts my be readily settled at distent points expeditiously and without the danger and expanse incident to the shipment of currency* Tot unless tbs check is universally freed from the imposition of exchange charges* which are in affect nothing more than an unwarranted tax « upon its free cirenlation* the full usefulness of the check as a medium of exchange cannot be attained* ith certain banks insisting upon an exchange charge while others will remit for the full auoutcb of a cheek* a merchant who receives an out of town check in payment for goods sold must face the risk of undvrgoing a loss in the form of exchange charges* which are often impossible to foreeoe and which are certainly very inconvenient and annoying when imposed* On the other hand* if all checks are universally collectible at par* the commercial interests of the country may rest assured that a check for *1*000 is worth #1*000 and not £999* or sens lssssr amount* Uniformity in He value of. a elroulat mg laedium is essential to its foil usefulness os soeh. . aivereal par clearance will insure to the check: a reedy acceptance everywhere* Checks on # .all towns will He just «s available as oheolcs oat large centers* hvery oheok* irrespective of the bank or locality upan which |it is drawn* should* in the interest of the entire country* rep eaont available funds in the full amount of its faoe value* If the cheek collection system set tip by Congress under the Federal deserve Act is to *eet properly the needs for which it was created, each Federal Reserve Bank must be prepared to accept for collection and to collect at par checks drawn upon all banks within Its district* The value of the collec tion service rendered by any clearing-house Is directly proportionate to the nursber of banks* checks on whibh mxy be collect d through it* Sr&n among the pilotssting non-bomber banks themselves* the desirability of universal par clearance is recognised* In a letter dated December 30* 1919, to the Fed ml Reserve dank of Atlanta* offered in evidence by the plaintiffs (it*# 88)* Urm h* K* Moore* President of the Merchant* • \ and Farmers bank of Roanoke* -la.* said* "To get down to real facts* we are ready to remit at par for our e eeks when we oan olear everything at par* * * ** There is no doubt but that every check in this country should be remitted at. per* and I trust to see this in effect soon*14 Moreover* the imposition of exchange charges constitutes a serious and unwarrantable burden upon the commerce of the country as such* It has been estimated that the amount of exchange charges .7 m k \• rhltfi the oomeroe of the country would have to bear in case tbm usual exchaags elArgot wore assessed upon all out of town checks a ‘ would account in a year, in round figures, to satae 135,000,000 (R., 124~5). The dictates of sound banking and far teeing policy clearly require that such a condition at this a llo w e d not be to continue, at it nott assuredly will unless th e par olear~ anoe plan of the Federal deserve a*nir ia upheld. -r ' . i F o r m N o . 131' Office Correspondence To Mr. Hamlin /V# FEDERAL RESERVE BOARD _____________________ D a te _ March 1 7 , 1932 Subject:. In accordance with your telephone req u est, I am giv in g below a c l a s s i f i c a t i o n o f bankers acceptances h e ld by the Federal reserve banks on the l a s t day o f January, 1 9 32. Bankers acceptances, payable in d o l l a r s , based on Imports Exports Domestic tran saction s D o lla r exchange b i l l s Shipments between or storage o f goods in foreign countries Transactions in v olv in g shipment o f goods between the United S tates and two or more other countries Bankers acceptances payable in fo r e ig n curren c ie s T otal $ lb ,U 78,000 18, 919.000 32, 1+70,000 2, 239,000 1+7 , 1+66,000 z I f 7 .* 1 , 917.000 33,UUU,000 1 5 2 .9 3 3 .0 0 0 n The la t e s t inform ation we have as to the amount o f re a l e s ta te loans h e ld by member banks i s fo r December 3 1 . 1931* On that d a te, as you w i l l note from the Member Bank C all Report attached h e r e to , n ation al banks h eld i 000 $ 2 9 1 ,7 8 7 ,0 0 0 o f loans based on farm land and $ l ,3 S 8 ,0 0 0 /o f loans on other real e s ta te . A ll member banks on th at date h e ld $ 3 5 9 ,0 6 5 ,0 0 0 o f loans based on farm land and $ 2, 678,^,000 o f loans based on other r e a l e s t a t e . ■7 / C> i r K o /.* I f * ? ' VOLUME 225 PAGE 128 <3 , / _' To^ Mr. Hamlin Subject:. From 0*0 2— 8495 Complying with the request contained in your note o f March 1 7 , the attached ta b le has been prepared comparing p rice movements with changes in money in c ir c u la tio n and in reserve bank c r e d it . In s e le c tin g the periods fo r which to show the changes in each s e r i e s , the movement o f p rice s has been used as a gu id e. I f eith e r o f the other two s e r ie s were used as a base fo r p e rio d izin g d iffe r e n t data would have to be presented. In using th ese fig u r e s i t should be borne in mind th a t th ere i s a marked seasonal movement o f money in c ir c u la tio n and some seasonal movement in reserve bank c r e d i t , but no seasonal movement in p r ic e s . The c o rre la tio n s shown in the ta b le are in a good many cases sub s t a n t i a l l y a ffe c te d by these circum stances. Between December 2 5 , fo r example, and June 2 7 , the larger part o f the d eclin e shown fo r money in c ir c u la tio n r e f l e c t s only the fa c t th a t there is always more money . in c ir c u la tio n at Christmas time than there is in the middle o f the y ear. <\ VOLUME 225 PAGE 129 V SU.c Fo rm 2*0. 131 Office Correspond ence To_________ Mr* Hamlin FEDERAL RESERVE B 0A R D Date March 21 f 1932 Subject:. F r o m _____Mr. Van Eoasen 2 — 8 405 I In accordance wit^h your request of March 17, we have prepared the attached statement showing the average amount of reserve bank credit outstanding and of related items during the first week in January 1922 and 1929, the week ending October ending March 12, 1932. VOLUME 225 PAGE H 9 26 , 1929 and the week AVERAGE RESERVE BANK CREDIT OUTSTANDING AND RELATED ITEMS DURING THE FIRST WEEK IN JANUARY IN 1922 AND 1929, THE WEEK ENDING OCTOBER 26, 1929, AND THE WEEK ENDING MARCH 12, 1932 (In millions of dollars) Week ending Jan. 7,1922 Week ending Jan. 5.1929 Week ending Oct.2 6 .1929 Week ending Mar .12,1932 1,106 l.o U s 8U3 757 Bills bought 126 U91 355 136 United States securities 23^ 239 1U0 786 Other reserve bank credit 39 5^ 71 26 Total reserve bank credit 1.305 1.832 1.U09 1.705 ♦Monetary gold stock 3,663 U ,12 6 ^ ,3 8 6 ^.3 6 3 ♦Treasury currency adjusted 1.553 1.785 1.793 1.778 #Money in circulation H.665 U .932 U .791 5.563 #Member bank reserve balances 1,7^1 2,h2 9 2,378 1.901 315 382 U l9 382 Bills discounted #Unexpended capi tal funds, non member deposits, etc. ♦Factors of decrease #Factors of increase fJU t+ ~ AVERAGE RESERVE B A M CREDIT OUTSTANDING AND RELATED ITEMS DURING THE HIRST T^EHK IN JANUARY IN 1922 AND 192° (in millions of dollars) Week ending Jan. *5,1929 Week ending Jan. 7,1922 l.oUS 1,106 B i l l s bought U 91 126 United States securities 239 23 U Other reserve bank credit 5U 39 Total reserve bank credit 1,832 1,505 ♦Monetary gold stock U ,126 3.663 ♦Treasury currency adjusted 1,785 1,553 #Money in circulation U.932 U,6b5 fMember bank reserve balances 2,U29 1.71*! 3S2 315 Bills discounted # Unexpended capital funds, nonmember deposits, etc. ♦Factors o f decrease ^Factors of increase ■ h ^ y — PRICE MOVEMENTS COMPARED WITH .. . CHANGES IN MONEY IN CIRCULATION AND RESERVE 3ANX CREDIT 4 Period >*,. May, Change in Change in money reserve in bank circulation credit (In millions' of dollars) Price Change (Per cent) 1930 - January, 1923 -45 February, 1922 - March, 1923 f +15 j -887 — 2,059 +186 - 98 April, 1923 - June, 1924 - 9 +117 - 342 July, 1934 - February, 1925 +10 - 35“ *' + 208 0 +155 + 258 -10 -129 - 271 July, 1927 - October, 1927 * November, 1927 - October, 1923 + 3 +103 + 173 0 - 98 + 367 November, 1928 - February, 1932 -31 +791 + 164 March, 1925 - November, 1925 December, 1925 - June, 1927 ✓ . . f Periods shown have been determined by reference to movements of the United States Bureau of Labor Statistics’ index of wholesale prices. Changes in money in circulation and reserve bank credit based on monthly averages of daily figures. CHANGES IN AVERAGE RESERVE BANK CREDIT AND RELATED ITEMS BETWEEN TEE WEEK ENDING JANUARY 7. 1922, AND TEE WEEK ENDING JANUARY E , 1 9 2 9 . (In millions cf dollars) Increase or decrease Bills discounted - Bills bought + 363 U. S . securities + 5 Other reserve bank credit + 15 Total reserve bank credit 5 s + 327 FACTORS RESPONSIBLE FOR INCREASES IN RESERVE BANK CREDIT Member bank reserve balances + 688 Money in circulation + 267 Unexpended caoital funds, nonmember deposits, etc. + 67 +1022 Total FACTORS RESPONSIBLE FOR DECREASES IN RESERVE BANK CREDIT Monetary gold stock + U6 3 Treasury currency, adjusted + 232 + 695 Total NET CHANGE 327
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