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The Papers of Charles Hamlin (mss24661) 365_10_001- Hamlin, Charles S., Scrap Book — Volume 226, FRBoard Members 205.001 - Hamlin Charles S Scrap Book - Volume 226 FRBoard Members BOARD OF GOVERNORS OF THE • FEDERAL RESERVE SYSTEM Office Correspondence To From The Files Date August 6, 1941 Subject: Mr. Coe ivi2e After correspondence with Mrs. Hamlin (see letters of May 25 and June 4, 1941) the items attached hereto and listed below, because of their possible confidential character, were taken from Volume 226 of Mr. Hamlin's scrap book and placed in the Board's files: VOLUME 226 Page 43 Proposed Amendment to the Federal Reserve Act with Regard to Advances to Member Banks on their Promissory Notes. (Draft-Wyatt) Page 59 Letter to Senator Walsh re Purchase of Municipal Obligations by F.R.Bk. of Boston. Page 85 Memo to Mr. Hamlin from Mr. Goldenweiser re banking developments between 1922 and 1929. Page 125 Memo sent to Sen. Norbeck April 6, 1932, in response to an inquiry from Senator Glass as to whether the Proposed Amendment suggested by the Board to Section 14 of the Act would "abrogate the right of a Federal Reserve Bank to initiate the discount rate and transfer it to the F.R. Board". Page 137 Memo to Mr. Hamlin from Mr. Smead re Commercial paper held by member banks. Pages 132, 134, 136, 138, and 139 Blank ' PROPOSED AMENDYENT TO THE FEDERAL RESERVE ACT WITH REGARD TO ADVANCES TO MEMBER BANKS ON THEIR PROMISSORY NOTES. The original Federal Reserve Act authorized Federal reserve banks to rediscount commercial and agricultural paper for their member banks, but did not permit them to make direct loans to the member banks on the promissory notes of the latter. Because of the in- convenience of rediscounting many separate pieces of commercial or agricultural paper, however, many member banks preferred to borrow from their correspondent banks on their own promissory notes, as they had peen accustomed to do before the enactment of the Federal Reserve Act, rather than to change their method of borrowing so as to avail themselves of the rediscount facilities of the Federal Re serve System. The amendment of September 7, 1916, was accordingly adopted authorizing Federal reserve banks to make direct loans to their member banks on their promissory notes secured by paper eligible for rediscount or for purchase by Federal reserve banks or secured by bonds or notes of the United States, but the maturity of such notes was limited to fifteen days. The effect of this amendment was to provide another and simpler form of borrowing from Federal reserve banks, without in any respect departing from the fundamental purposes of the Federal Reserve Act or broadening the character or class of paper or securities which might be legally acquired by Federal reserve banks; and the amendment now proposed to increase the maximum VOLUME 226 PAGE 43 di4 S - 2- • maturity of such direct advances to member banks to ninety days would be merely an extension of the principle of the 1916 amendment. There is no logical reason why Federal Reserve Banks should not have the same latitude in making advances to their member banks against the pledge of commercial, iniustrial and agricultural paper which is eligible for rediscount as they have with respect to rediscounting such paper; since the underlying transactions giving rise to the credit are the same; the substance of the transaction remains the same; and only the form is changed. On the other hand, there are important reasons why this more convenient and practical method of extending credit should not be limited to advances for fifteen days. The privilege of borrowing on their own notes from Federal reserve banks afforded by the 1916 amendment has been used extensively by member banks which are located in the same cities with Federal reserve banks or their branches or in nearby cities; but country banks generally have found it impractical to avail themselves of the privilege to any great extent, because it is inconvenient for them to renew their notes every fifteen days. Rediscounting, therefore, is still the only practical method available to many country banks of obtaining credit from the Federal reserve banks, and many country banks continue to borrow from their city correspondents on their own promissory notes, instead of rediscounting with the - 3- Federal reserve banks. This probably is one of the reasons why many country banks have not joined the Federal Reserve System. The banks consider rediscounting unnecessarily traublesome and inconvenient. IL order to obtain any substantial amount of credit through rediscounting, a member bank usually finds it necessary to offer a number of separate notes or bills of varying amounts and of different maturities; and the amount of discount must be calculated separately for each of these notes or bills. For example, if a member Dank wishes to reaiscaunt with its Federal reserve bank paper in the amount of $100,000, it may be necessary for it to offer as many as twenty or thirty notes of its customers, of different amounts and maturing on different dates; and the discount must be separately computed as to each of these notes. If for any reason other notes are later substituted for some of those first rediscounted, the amount of discount on each of the substituted notes must also be calculated. When a member bank borrows on its own promissory note secured by collateral, however, it is only necessary to compute the interest on one note for the full amount of the loan and, in cases of substitution of collateral, no additional computation of interest is required. Furthermore, in the event of the failure of a member bank which has rediscounted notes with a Federal reserve bank, it is necessary for the Federal reserve bank to prove a separate claim against the insolvent institution for each note under rediscount; 4 whereas, in a case where a Federal reserve bank holas a member bank's own note secured by any number of notes as collateral, it may, in the event of the failure of the member bank, prove one claim for the entire amount. It is evident, therefore, that an amendment to the law increasing the maximum maturity of advances to member baknirs on their promissory notes secured by paper eligible for rediscount or for purchase from fifteen to ninety days would be of material benefit both to member banks and to Federal reserve banks. The reasons for such an amendment, which have been discussed above, may be summarized briefly as follows: 1. Under existing law, rediscounting is the only practical method available to many country banks of obtaining credit from Federal reserve banks. 2. Rediscounting is necessarily troublesome and inconveni- ent to member banks because of the necessity for calculating separately the amount of discount on each note offered for the purpose, and because in cases of substitution of notes interest must be calculated separately on each substituted note. 3. Borrowing by member banks on their promissory notes does not involve the difficulties which are present in rediscounting. 4. The proposed amendment would eliminate the necessity and inconvenience of frequent renewals of mamber banks' promissory S • 5 notes and would thus render this method of obtaining credit from Federal reserve banks practical for use by country banks. 5. A cause of dissatisfaction among country member banks and one of the reasons why many country banks have not joined the Federal Reserve System would be removed. 6. In the event of insolvency of a member bank,each note under rediscount for such bank must be proved by the Federal reserve bank as a separate claim, but the entire amount of an insolvent member bank's promissory note secured by collateral may be proved as one claim. 7. The amendment would not involve any departure from the fundamental purposes of the Federal Reserve Act but would be merely an extension of the principle of the amendment adopted in 1916. The Federal Reserve Board feels that the increase in maturity of advances on member banks' promissory notes should be limited to notes which are secured by paper eligible for rediscount or purchase by Federal reserve banks and that it should not be made applicable to advances secured by bonds or notes of the United States. It is believed that the proposed increase in maturity of notes secured by paper eligible for rediscount or purchase is adequate to meet the difficulties mentioned above. Under the existing law, Federal reserve banks are au- • • -6 thorized to purchase debentures and other such obligations of Federal Intermediate Creait Banks which have a matuqty at the time of the purchase of not more than six months. Such obliga- tions of Federal Intermediate Credit Banks are secured by agricultural paper which, when of proper maturities, is eligible for rediscount by Federal reserve banks. In these circumstances the Board believes that it is desirable that the law should be amended so as to permit debentures and other such obligations of Federal Intermediate Credit Banks, when complying with the requirements for purchase by Federal reserve banks, to be used as security for advances by Federal reserve banks to member banks on their promissory notes for periods not exceeding fifteen days. Narch 10, 1932 Hon. David I. Walsh, United States Senate, Washinzton, D. C. 7ty dear Senator rtalight Thio will acknowledge reeeipt of your letter of March 3 enclosi ng copy Of your letter of February 11 to 10n. awns Meyer, Governor of the iederal Lesurve Board, and oopy of his reply to you datei '4broary 10, 1932, all in reference to the purchase of municipal obliL;ations tp, the Federal heeerre Bank of Boston. In replying to your specific impary, I Oil going somewhat into deta.1.1 in order that you may fully appreciate our position sod loy attUon we hare taken. Seotion 14 of the Federal Reserve Act permits us to buy certain municiD al &Alsatians under rules and repletion' of the Federal aeserve 3oard. / am sending herewith eopy of the Boarits regulations r trdin: the purchas e of warrants either with or without the endorsement of a Laember bank. The regulations of the Federal Reserve Board are such that no doubt any *municipal cb14;ationk.in New fingland would be eligible far purehase. 14 hseuvers have not been purOhossis of such obligations for siveral years tossose up to Imet Fell these obligatifts elvers found a r,Ady oOtside market at very flOssable rates, exeept in some Of the smaller communities wher'; the issues were handled by the local banks. Late last Pall the outside market practically disappeared, with the result that we had several inquiries es to what we mild do to relieve the situation. As stated above. Section 14 of the Federal Reserve Act and the Regulations of the Yederal Reserve Board give UM plenty of latitude to purchasa such oblisatiems but the diffioulty arises in Section 15 which you will observe by rd, ading, doe* not permit us to pledge such warrants as collateral security for Federal reserve notes. Therefore, our capacity to buy is zoverned largely by Our free told position. The free gold position of the Federal Reserve Bank of NOUS 'rules from day to day a. flurinc the past six months it has been as low as 4 million dollars and at the present tins it is ap2roximate1y 24 million dollars. In Doesmber of last year when the *train seemed to be most sew% we made a rough osurfass of the probable needs of New 14;land for the Gaming year end we arrived at the figure of approsimate4 200 million dollars. Bad we entered the markot at that time with the free gold that vas available, obviously our assistants, by direct pnrahases mould not have proved sufficient. We, there're, were easpelled to approaeh the problem from an entirely different angle, and in VOLUME 226 PAGE 59 MOn* Dead I. TWA wew larch 10, 1032 answer tp inquiries from)par member banks we reminded them that our rediscount *aro open to them and if they cvt-red to render the necessary assistance to the mmielpalities they could secure the credit needed by discountin& eligible paper with us and. carry tho municipal obliottions in their own portfolio anti' such time as their eliible paper was aelausted„ than we would give them assistance on their municipal obligltions if our tree &old pool:Am permitted such action. In this way, we could use tho eligible paper as rollaterel security for Federal r,Atorve notes and not affect our tree gold position in any appreciable amount. In other words, we can expand many times farther if we acquire eligible paper than we would be able to if we purchase municipal obligations. le believe that we pursued the right course in the circumstances mod think by the fast that that this proven was helpful to the situation is evidenced unable to negotiate at 6 per eent their obligations certain municipalities that were taken etlre or and have withdrawn or better thirty days ao„ .ate had their needs offerin40. In fact, one municipality was al:zee:30N1 in raising the funds needed I do not want you to areLve at to conclusion that our at a rate of 13 per cent. action alone brout about this situation bsoeuse other factors such as ells Reconstruction Mance Corporation and an casing of the tension. in t.ho bankin& situation of Nivw Ragland also contributed. The mutat amendment to the Federal Reserve Act contained in the Glass SteaiAll Dill offers further opportunities for relief in emor&emies ineetar as our re muniel ob14. ti free gold is concerned, but rq ardless of whether we ac St1 or ap un or ASS aiesorvo or under Section 14 of the Gtsio— irip tot we -cannot ,p1jI TiMarori) rgabous -7oitT TNITTIVITTITTWATT— era• reserve n..ss and, therefore, our or e vAd as co atera securi lar — iir— as a municipil oblif.Ation is concerned. problem is still with UA irs ir401101' I hove attempted to make tAs Utter oonoiseibut if there are other Inquiries or sutzestions that you may wish to make I will greatly appreciate yogar writtwae again. Yours respectfully, L. A, Munro Governor, be 1:31 4 Office Correspontence To Mr. Hanlin From Mr. Goldenweise FEDERAL RESERVE BOARD Le4 • Date April 1, 1932 Subject: GPO In reply to your inquiry of March 24, I enclose a table which gives the fundamental figures bearing on bankinR- developments between 1922 and 1929. You can see from this table that monetary told stock increased during the period by $481,000,000, and in addition there was an increase of $233,000,000 in reserve bank credit and an increase of $181,000,000 in Treasury currency adjusted, which represented silver purchases and issue of silver certificates by the Treasury. Of the funds put into the market from these three sources, increase in money In circulation absorbed $228,000,000, cg)ital and surplus of the Fed— eral reserve banks absorbed $90,000,000, and $577,000,000 went into ( member bank reserve balances. It is a fair statement, therefore, to say that all of the gold received during that period, and even more, went into member bank reserve balances, where it constituted a basis of credit expansion. Member bank credit, as a matter of fact, in— creased by $11,500,000,000 during this period, or at an approximate rate of $20 of member bank credit for $1 of member bank reserves. The facts are clear enough, but the question whether Federal reserve policy could have prevented these developments is one we have often discussed and one that is debatable. You will notice that, taking this particular period, there was a decrease of $247,000,000 in Government security holdings of the reserve banks and an increase of $380,000,000 in discounts, so that the Federal VOLUMF, 226 PAGE 85 2-8495 • ‘4.• Mr. Hamlin, - #2 reserve system did to some extent offset the inflow of gold and member banks increased their borrowings. As I think I have had occasion to say before, I believe that taking the period as a whole there is little that one can criticize in the conduct of the Federal reserve system. If, however, particular briefer periods are considered, it would seem that in 1924 the Federal reserve bought too many securities and forced too much credit on the market and in 1927 it did the same thing to a minor extent. I think that in the light of what we have learned more recently it is clear that the country would have been better off if Federal reserve policy throughout the period had been somewhat more conservative. To be sure, we would probably have not had some of the years of extraordinary prosperity, but it is possible that we would not now be in so deep a depression. In view of all the disturbing factors that were operating during the period, and the newness of the problems, I do not believe that the system can be criticized legitimately for its course of action. I do think, however, that it is Important that the lessons of the period be clearly worked out and ing future policy. indicated so that they will be helpful in shap- • CHANGE IN RESERVE BANK CEEDIT, GOLD STOCK, ETC. COMPARED WITH CHANGE IN MEMBER BANK LOANS AND INVTSTMENTS, 1922-1929 In milnons of dollars Averages of daily figures 1922 1929 Change 571 159 455 41 951 241 208 59 +380 + 82 -247 + 18 Total reserve bank credit Monetary gold stock Treasury currency adjusted 1,226 3,802 1,604 1,459 4,283 1,785 +233 +481 +181 Money in circulation Member bank reserve balences Nonmember deposits, etc Unexpended capital funds 4,535 1,781 30 286 4,763 2,358 30 376 +228 +577 0 + 90 Member bnnk loans end invest2124,130 ments /55,727 1: +11,597 Bi3ls discounted Bills bought United States securities Other reserve bank credit V Figures for all member banks; averages of call dates. • Memorandum Sent to Senator Norbedk April 6, 1932, in reponse to an Inquiry from Senator Glass as to whether the Proposed Amendment Suggested by the Board to Section 14 of the Act would "abrogate the Right of a Federal Reserve Bank to Initiate the Discount Rate and Transfer it to the Federal Reserve Board." (There is another question answered in the letter Which is not material to this matter) •••••••• ••••• The question has been raised whether the proposed amendment to Section 14 of the Federal Reserve Act suggested on page 21 of the comments and recommendations of the Federal Reserve Board regarding Senate Bill 4115 would "abrogate the right of a Federal reserve bank to initiate the discount rate and transfer it to the Federal Reserve Board." The answer is that the proposed amendment was not intended in any respect to increase or add to the powers of the Federal Reserve Board over discount rates of Federal reserve banks,and that it does not do so. On this subject, Section 14 of the Federal Reserve Act now provides as follows: "Every Federal reserve bank shall have power: * * * * * * * * * * * 11(d) To establish from time to time, subject to review and determination of the Federal Reserve Board, rates of discount to be charged by the Federal reserve bank for each class of paper, which shall be fixed with a view of accommodating commerce and business." By administrative interpretation, acquiesced in by all Federal reserve banks since the earliest days of the Federal Reserve System, it is definitely settled that any discount rate established by VOLUME 226 PAGE 125 2. • arty Federal reserve bank cannot became effective until it has been reviewed and determined put into effect, by the Federal Reserve Board. The proposed amendment, which was intended to clarify the Board's power over purchases and sales by the Federal reserve banks in the open market, wpuld insert in Section 14 of the Feueral Reserve Act before the words, "Every Federal reserve bank shall have power", the words, "Subject to such regulations, limitations, restrictions and procedure as the Federal Reserve Board may prescribe." If applied to the power of the Federal reserve bank3 to establish discount rates "subject to review and determination of the Federal Reserve Board, "the power to prescribe regulations, limitations, rebtrictions and procedure governing the establishment of such rates would not enable the Board to do anything which it cannot already do in the exercise of its powers in connection with the review and determination of such rates. In this connection, attention is invited to the f:-.ct that Section 11 of the Federal Reserve Act now authorizes the Federal Reserve Board to "exercise general supervision over said Federal reserve banks" and to "make all rules and regulations necessary to enable said board effectively to perfore its duties and functions undr the Act; and Section 13 provicbs that: "The discount and rediscount and the purchase and sale by any Federal reserve bank of any bills receivable and of domestic and foreign bills of exchange, and of acceptances authorized by this Act, shall bet subject to such restrictions, limitations, and regulations as may be imposed by the Federal Reserve Board.“ • Form N)Ri. 131 Office Correspontence To Mr. Hamlin Fro r. Smead FEDERAL RESERVE BOARD Subject: Date April 11, 1932 Commercial paper held by member banks 'aro 2-8495 In accordance with your telephone request of last week, we have prepared and are handing you. herewith a statement giving certain figures of Paper eligible for rediscount with Federal reserve banks, United States Government securities, etc., in comparison with total loans and investments of national banks and. of all member banks,at the end of December 1931 as compared with June 1915, June 1918 and June 1926. June 1915 is the first time that separate figures of loans on securities and of "all other" loans became available; June 1918 is the first date for which eligible paper figures are available, though for national banks only; and June 1926 is the first date for which figures of eligible paper are available for both national and state member banks. Since June 1926 there has been a decline in the amount of eligible paper as well as in the amount of eligible paper plus Government securities reported by both national banks and all member banks, also in the ratios of such paper and securities to total loans and investments. On the other hand, there has been a steady rise in the ratio of loans on securities plus securities owned, to total loans and investments. VOLUME 226 PAGE 137 • CLASSIFICATION OF LOANS AND INVESTMENTS OF ALL BANKS AND OF MEMBER BANKS, 1915, 1918, 1926 AND 1931 (In millions of dollars) June 1915 I I i June 19 18 June 1926 1 December 1931 L NATIONAL BANKS g Loans and investments Loans - total 688 , 6.63_ On securities All other Investments- total U.S.Government securities Other securities Eligible paper Eligible raper plus U.S. securities 13,914 19,159 19,094 10,078 13322 11,315._ 1,750 4,913 2,577 ' 7,50, 4,034 9,288 4,116 7,789 2,025 3,835 7,139 749 1,276 2,025 1,310 5,337 2,466 3,371 3,171 4,018 * 3,218 3,497 1,827 * 5,243 5,963 4,998 8,7614 18,507 31,184 30.575_ 6.720 13.233 22.060 19 261 * * 7,321 14,739 7,320 11,940 ALL MEMBER BANKS Loans and investments Loans - total * * On securities Allcther Investments - total U.S.Government securities Other securities Eligible paper Eligible paper plus U. S. securities 2,044 5,274 9,123 11,114 749 1,295 2,465 2,809 3,745 5,378 5,319 5,996 * * 4,925 2,573 * * 8,670 7,892 56.5 23.1 53.9 18.3 48.5 9.6 40.8 * 37.7 31.1 26.2 43.5 46.1 51.5 59.2 15.8 47.3 g.4 39.1 27.8 25,8 52.7 60.9 RATIO TO TOTAL LOANS AND INVESTMENTS National banks: Of eligible rarer Of "All other" loans Of eligible paper plus U. S. securities Of loans on securities plus investments Member banks: Of eligible paper Of "All other" loans Of eligible paper plus U. S. securities Of loans on securities plus investments *Not available. FEDERAL RESERVE BOARD DIVISION OF BANK OPERATIONS APRIL 11, 1932
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