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COMMITTEE ON THE HISTORY OF THE FEDERAL RESERVE SYSTEM
33 LIBERTY STREET, N E W YORK 45, N E W YORK
TELEPHONE: RECTOR 2-5700, EXTENSION 286
ALLAN SPROUL, Chairman
W. RANDOLPH BURGESS
ROBERT D. CALKINS
F. CYRIL JAMES
WILLIAM MCC. MARTIN, JR.
WALTER W. STEWART
JOSEPH H. WILLITS
DONALD B. WOODWARD, Secretary
MILDRED ADAMS, Executive Director
With cooperation of
THE BROOKINGS INSTITUTION
722 JACKSON PLACE, N. W.
WASHINGTON 6, D. C.
June 5, 1956
Dear Dr. Buchanan:
This letter is to report on the progress of work under the direction
of the Committee on the History of the Federal Reserve System, and to make
recommendations for the future of this project which is supported "by a grant
from the Rockefeller Foundation.
The original request of this Committee for financial support contemplated three main activities: (a) archival and research, intended to discover and make available materials that would be useful in the preparation of
the history of the Federal Reserve System; ("b) interviews with individuals who
have participated in the life of the System, in order to obtain personal recollections of value to future historians; and (c) arrangements for the writing
of a "definitive" history of the Federal Reserve System as the central responsibility of the Committee, the encouragement of monographs and essays dealing
with special phases of the history of the System, and the editing and publishing
of important documents relating to the history of the Systemc The grant made
by the Rockefeller Foundation was for the support of these activities.
Two previous reports which this Committee has made since January,
1954, when the first pilot grant was made, review the details of work which
was commissioned and of research and archival studies accomplished up to
July 1, 1955- Rather than furnish a supplementary report for the year ending
in June, 195&, I should like to put before you a summary of the Committee's
entire achievement so that you may see how far we have gone toward our goal
in spite of serious difficulties encountered in finding research personnel.
A.
Archival Activities
The archival activities of the Committee have progressed well under
the able direction of Mildred Adams. We have reason to take pride in the general work of location and preparation of papers and materials. We believe we
have greatly increased the availability of research materials which will be of
benefit to historical studies of the System whether conducted under this
Committee or not. This work is now largely completed, for the time being,
and Miss Adams has resigned as Executive Director effective July 31 > 1956 <.
The search for private collections of papers which bear on the creation and development of the System was one of the first undertakings of the
Committee. More than a hundred of these collections have been found„ Considerable data about them and their owners have been organized, duplicated
Dr. Norman S. Buchanan
2
June 5> 1956*
and distributed as a research aid to the Library of Congress, the New York Public
Library, the libraries of the Federal Reserve Board and the twelve Federal Reserve
Banks, and to some twenty universities which are distinguished for the quality
of graduate work offered in the fields of economics and monetary affairs o
The Selective Inventory of the Papers of Carter Glass, made by a group
of graduate students working under the direction of Dr o Elbert A. Kincaid of the
University of Virginia, was completed in the autumn of 1954. Copies of this
important research aid, mimeographed and put into binders, were in May, 195^^
distributed to the same libraries which received the data on private collections.
In the process of this paper hunt we have steadily disclaimed any wish
to amass collections ourselves, and have asked only that they be put where scholars
could consult them. In several instances we have been instrumental in saving
papers from destruction and suggesting depositories which were glad to get them
and render them useful to students. This applies particularly to the papers of
Ogden Mills, Emanuel Goldenweiser, Col. Leonard Ayres, now in the Library of
Congress; of Fred I. Kent, now at Princeton, of Frank Vanderlip being set in
order at Columbia. There are many other instances.
In the course of its search for papers, the Committee found that New
York City, now the financial capital of the world, has no library where the private papers of bankers and financiers who have played so important a part in
building the American economy to its present strength are collected in a center
equipped for the use of scholars. On conferring with the appropriate officials
of Columbia University, we discovered a quality of interest in this project which
might lead to the establishing of such a center were it properly encouraged and
financed. As a first move in this direction, and for the immediate purpose of
sorting and cataloging the rich Frank Vanderlip collection (which had been disintegrating in a Duchess County garage until our executive director found it and
steered it to Columbia), we made a sub-grant of $1,500 to the library of Columbia
University. The University plans to seek other funds for the prospective Finance
Library Center from other sources,,
In 1954 and 1955> this Committee made a survey and summary report on
historical materials in the libraries and files of the Federal Reserve Board and
the twelve Federal Reserve Banks, and reported that, not only had considerable
early materials been destroyed, but that a continuing program of destruction
threatened more recent records. At that time we formulated and distributed a
list of materials which the twelve Banks might be presumed to wish to keep as
historically valuable, and which answered the repeated question, "But what do
you mean by historical material?"
This problem was brought to the attention of the Conference of
Presidents of the Federal Reserve Banks, which had a working subcommittee on
the Destruction of Records. After several conferences and repeated discussion,
the subcommittee revised its Destruction Manual to emphasize the importance of
preserving records described as of historical value, and changed its name to
Sub-Committee on the Retention and Disposal of Records. It is the hope of the
Committee on the History of the Federal Reserve System that this achievement,
reaching direct to the operating level of the Banks, may preserve for the use
of future historians important materials which would otherwise be slated for
destruction.
Dr. Norman S. Buchanan
3
June 5, 1956
The card files which were started early in the life of this Committee
have now become highly valuable research tools, and are so keyed together as to
make it possible to move easily back and forth between desired details of period,
office, people, policy, legislation and litigation involving the System. In addition to this Time File, Persons File, files for banks and economists, we have a
bibliography of considerable size, still in the process of growing. When completed, it could form the basis for a highly valuable reference bibliography on
central banking, with particular reference to the unpublished material which
forms so important a part of that literature. The original intention was to
set these files up in such a manner that they could be reproduced and distributed
to other research centers, but thus far we have not felt justified in undertaking
so costly a step. They are, however, ready to serve where needed,,
B»
Interviews
The Committee has experimented with interviewing techniques and has
made transcripts of several conferences, which will be of use to historical
scholars,, The work of interviewing, however, has not been expanded because it
was felt that interviews should be coordinated with historical research under
the general direction of the contemplated historian,
C.
Research and Writing
The research and writing activities represent both achievements and
disappointments,, Progress has been greatly impeded by the lack of qualified
personnel.
The Committee achieved an initial success in its selection of
Dr. Lester Chandler of Princeton to write a biography of Benjamin Strong, the
first Governor of the Federal Reserve Bank of New York. The subject was one
which interested him, but one which he might never have undertaken except for
the aid given by the Committee„ This work is proceeding at a satisfactory
pace, and there is every reason to expect that an illuminating biographical
work relating to the history of the Federal Reserve System will be finished in
1957 as planned,
A substantial number of topics for monographic treatment have been
suggested and considered. For a number of them personnel is available. The
Committee has been impressed with the possibility of making significant contributions in the field by encouraging essays and intensive monographic studies
on particular aspects of the System and its experience. Indeed some members of
the Committee are of the opinion that a comprehensive history cannot be written
until after a number of principal episodes have been thoroughly explored in
monographic studies. Definite assignments for such studies were postponed, however, pending the selection of a scholar to direct the entire project and to
serve as author of the basic history.,
The loss of Dr o W. Randolph Burgess, who had been expected to take
major responsibility for the project and to write the definitive history of
the System, has been a major disappointment„ After it became clear that
Dr. Burgess could not leave the national service, we approached other distinguished scholars in the field, but found them unable to put aside existing
commitments,, We next turned to the possibility of using younger men, either
Dr. Norman S. Buchanan
4
June 5) 1956
as a writing team or as a group which might function through and "be inspired,
by seminar discussions in which members of the Committee and others of mature
experience and attainment. Two years of searching among men of caliber and
proven ability have given us a heightened appreciation of the difficulties
inherent in the very condition which gave rise to the original request for a
grant. Economic historians equipped to study and write about monetary affairs
are few in number, and modern research into the development of the role of
central banking in the American economy is extremely limited, The Committee
has thus far been unable to overcome the deficiency of personnel which characterizes this field of study.
At the present time, the Committee is conducting negotiations through
the Brookings Institution with Dr. Redvers Opie as a possible director and historian for the project. Whether Dr. Opie will be available or not cannot be
ascertained until late July or early August, after he had had an opportunity
to consider this assignment in relation to his other commitments. If he should
be available, he would undertake a major history of perhaps two volumes, encourage the preparation and publication of supplementary monographs and essays,
and we hope organize (with the aid of funds obtained for the purpose) a seminar
on the development of central banking as a means of stimulating younger men to
work in this field and to offer a means of drawing on the experience of older
men who have worked in the System. If Dr. Opie should not be available, the
search for a director and historian would be continued in the hope that someone
of similar quality can be found.
Meanwhile, the Committee would like to commission several monographic
studies by authors familiar with the experience of the System. These studies
would cost little and they would contribute importantly to the general purposes
of the project.
With encouragement from the Committee, a legal history of the Federal
Reserve System has been started by Howard Hackley of the legal staff of the
Board of Governors, The portion now in draft gives an impressive and highly
useful record of legislative changes and judicial interpretations bearing on
the authorities under which the System has operated. It is hoped that this
study can be made one of the publications of this Committee.
Mr. Bray Hammond, whose new book, American Banks and Politics from the
American Revolution to the Civil War, had informal aid from the executive director of this Committee which led to its publication by the Princeton University
Press, is outlining for us a monograph on "The Evolution of the Payments
Mechanism." The payments mechanism is of key importance to the smooth operation of the banking system and of the whole economy. The development and
implications of the mechanism are seldom understood. A preliminary memorandum
outlining this project has been prepared. The Committee hopes to work out an
arrangement whereby Mr. Hammond would undertake this study for the Committee,,
The retirement of Dr. John Williams from the New York Federal Reserve
Bank offers the possibility that he may write a small volume, perhaps of essays,
on the development of monetary theory and policy during the last quarter century,
Such a contribution should be a publication of the Committee. On the basis of
preliminary discussions with Dr. Williams, it seems likely that such an assignment would be welcome.
Dr. Norman S. Buchanan
5
June 5,
These are some of the more urgent topics "but there are others which
the Committee would like to encourage or sponsor, when a director has been
chosen.
Administration and the Future
The foregoing achievements of the Committee are substantial, even
though the search for a distinguished scholar, trained in the economic and
historical disciplines, equipped with sufficient knowledge of monetary theory,
minded and able to accept a commitment to head this project and to write the
desired "definitive" history, has not been successful.
During the past two years two types of difficulties have been encountered in the operation of the Committee. The first has arisen from the
recognition by the Committee that it had assumed a commitment to the Rockefeller
Foundation for a "definitive" history as the principal objective of the Committee
work. The second has been the difficulty of exercising administrative responsibilities by means of a committee consisting of members geographically scattered
and all busy.
As the explorations of the Committee have continued, it has become
increasingly clear that a "definitive" history of the nature and scope originally contemplated is not feasible at this time. The Committee considers it
likely, however, that a history of scholarly character and substantial worth
may be brought into being, and it is confident that a number of highly worthwhile monographic studies dealing with important aspects of the history of the
Federal Reserve System are feasible and desirable. The Committee has been
reluctant to launch monographic studies of this sort until the fulfillment of
its principal commitment for a "definitive" history could be assured or until a
reorientation of approach could have the sanction of the source of its funds.
The Committee believes that the funds can be properly and wisely used for selective monographic studies and that these would represent an important contribution
to historical research, even though a definitive history is not now deemed to be
feasible. After two years of experience the Committee is of the opinion that
this is the way to proceed and that it requires greater latitude and freedom
with respect to its obligation to the Foundation.
Accordingly, the Committee requests the approval of the Foundation
for a clarification and reinterpretation of the project. The original intent
of the project was to undertake certain archival activities and interviewing,
to assure the writing of a "definitive" history of the Federal Reserve System,
to encourage monographs and essays on the history of the System, and to edit
and publish documents. Most of these obligations present only minor problems 3
The Committee, however, would like to be relieved of its obligation to bring
about the writing of a "definitive" history, and would like instead authority to
develop and encourage slightly less ambitious studies on the history of the
Federal Reserve System, including such monographs, essays, and histories as may
be possible. The Committee would expect that its continued activities would
result in the preparation and publication of a one or two volume history of the
System, if such a treatment proves feasible. It would expect also to encourage
worthwhile monographic studies and essays that would contribute to a better
understanding of the System, and would develop this part of the project as a
supplement to, or a substitute for, more comprehensive historical treatment0
The Committee believes that this greater flexibility will assist substantially
in stimulating further worthwhile work in this field.
Dr. Norman So Buchanan
6
June 5,
The administrative difficulties confronting the Committee have arisen
"because of the time required to communicate with Committee members, to schedule
meetings, and to conduct negotiations. There has been no lack of interest and
attention by Committee members. All members of the Committee have been most
loyal in attending a substantial number of meetings„ Nevertheless, delays have
been inevitable. The Committee recently asked the Brookings Institution, which
has collaborated on the project from the beginning, to accept an added degree
of administrative responsibility by initiating proposals for the consideration
of the Committee and by appointing a staff member to assume a degree of executive responsibility for the project.
Brookings
Committee
end to my
Executive
The transfer of this added administrative responsibility to the
Institution has been occasioned by my resignation as Chairman of the
on the ground that my departure for the West Coast puts a necessary
active participation in Committee work, and by the resignation of the
Director, as well as by the desire to facilitate administrative action.
The Committee is now of the opinion that this partial transfer of
administrative responsibility is not enough, if negotiations are to proceed
promptly for monographic and other studies. After two years of exploratory work,
it is believed that the time has come to transfer further responsibility to the
Brookings Institution. Accordingly, the Committee recommends that the Brookings
Institution assume full administrative and executive responsibility for the project, the Committee continuing to serve the project in an advisory capacity.
This arrangement is acceptable to the Brookings Institution, and the Committee
requests the Foundation to approve this transfer of responsibility,, The
Institution would continue to consult the Committee on all major matters of
studies and personnel connected with the project, and the Committee would read
and criticize manuscripts and be generally available for consultation, as it
now is. We believe that this transfer of administrative and executive responsibility for the project will simplify and promote the organization of the research activities which the project has always contemplated,
We would welcome a statement from the Foundation indicating its
approval of the use of its grant for the continuance of the project with these
two modifications —> an increased degree of flexibility in the interpretation
of the responsibility of the Committee for the preparation of a "definitive"
history of the Federal Reserve System and a transfer of administrative responsibility to the Brookings Institution„
Representatives of the Committee and of the Brookings Institution
will be glad to call on you in the near future for such discussion of this
proposal as the Foundation desires.
A copy of a Committee Resolution embodying the above recommendations
and a statement of estimated expenditures as of June 30, 1956 are attached.
Very truly yours,
Dr. Norman S. Buchanan, Director
Division of Social Sciences
The Rockefeller Foundation
49 West 49th Street
New York 20, New York
Attachments
(2)
Allan Sproul,
Chairman,
COMMITTEE ON THE HISTORY OF THE FEDERAL RESERVE SYSTEM
J
RESOLUTION
WHEREAS, the Committee on the History of the Federal Reserve System
recognizes the following situation:
1. That it was established for the purpose of developing available
materials and a history of the Federal Reserve System;
2. T'hat it obtained a grant from the Rockefeller Foundation specifically for archival activities, the interviewing of experienced participants
in the System, the writing of a "definitive" history of the Federal Reserve
System, the encouragement of other monographs and essays on the history of the
System, and the editing and publication of relevant documents;
3. That the Committee has made substantial achievements in finding
and making available private collections of archival materials, in collecting
remembered incidents from older officers, and in facilitating the preservation
of important records within the System;
__
4 O That the Committee has in progress a promising biography of
Benjamin Strong, the first Governor of the Federal Reserve Bank of New York;
5* That after two years of effort to find an appropriate author to
undertake the "definitive" history of the System, and after numerous alternatives have been considered or attempted, and have resulted in failure, the
Committee has reluctantly concluded that a "definitive" history cannot now
be prepared under its sponsorship;
6. That substantial and important contributions can and should be
made through historical research to promote a better understanding of the role
of this unique System and that such contributions can be made through mono=
graphic studies that examine important episodes in the history of the System,
through essays by participants in the affairs of the System, through the most
comprehensive history that may now be feasible, and through other supplementary
publications;
7. That such a program of studies and writings, though definitely
worthwhile and probably feasible, is not regarded by the Committee as the "definitive" history originally contemplated;
j
8. That, therefore, the Committee should seek an understanding
with the Rockefeller Foundation which will permit and authorize the Committee
to use the funds at its disposal for a program of studies that may offer important contributions to the over-all history of the Federal Reserve System, including as comprehensive a history as possible and such monographs, essays,
or other publications as may be approved by the Committee; and that the Committee
be relieved of its obligation to bring about the writing of a "definitive" history in the usual meaning of the term;
9. That after nearly two years of experience during which the
Committee has endeavoured to exercise its administrative responsibilities as
a group, it has become increasingly clear that administrative responsibilities
for the project should now be transferred to the Brookings Institution and
that this Committee should operate as an Advisory Commmittee to the project;
10. That the Committee has previously asked the Brookings Institution
to assume larger responsibilities for initiating plans and proposals, which it
has been willing to accept, and that the Committee has confidence in the capacity of the Brookings Institution to organize appropriate studies in line
with the purposes of the project;
11. That in launching this revised research program the Institution
will need the administrative freedom implicit in the proposal herein presented,
in order to make plans and negotiate promptly with personnel, and that this
transfer of increased responsibility to the Brookings Institution is made
acute and especially desirable by reason of the resignation of the Executive
Director of the Committee on the History of the Federal Reserve System effective
at the end of July, 195&, and by the resignation of President Allan Sproul
as Chairman of the Committee at the end of June, 1956;
Now, therefore, BE IT RESOLVED That the Committee recommends to the
Rockefeller Foundation that authorization be given for the use of the unexpended funds in its existing grant for historical research and the preparation
of a substantial history, historical monographs, or other essays and documents
on the history of the Federal Reserve System.
AND FURTHER BE IT RESOLVED That the Committee request the approval of
the Foundation for the transfer of full responsibility for administering the
project to the Brookings Institution with the understanding that the Committee
on the History of the Federal Reserve System will serve in an advisory capacity
to the Institution with regard to research and writing for this project,,
COMMITTEE ON THE HISTORY OF THE FEDERAL RESERVE SYSTEM
Minutes
Executive Committee Meeting,
Monday, May 28, 1956,
New York
Distributed
June 4, 1956
To:
Messrs.
Allan Sproul, Chairman
W. Randolph Burgess
Robert D. Calkins
F. Cyril James
William McC. Martin, Jr.
Walter W. Stewart
Joseph H. Willits
Donald B. Woodward
Winfield W. Riefler
The Committee convened for luncheon at 1 p.m. in the President's
dining room of the Federal Reserve Bank of New York, Members present were
Messrs. Burgess, Calkins, Riefler, and Stewart. As executive director,
Miss Adams attended. Absent members, Dr. James and Dr. Willits, were reported
unavoidably absent; Chairman Sproul was unexpectedly detainedj Mr. Woodward
was suddenly ill.
In the absence of the Chairman, Mr. Burgess was unanimously asked
to act in his place.
Minutes of the previous meeting (April 30, 1956) having been distributed, their reading was omitted.
Reports
Reports were made following decisions of the Executive Committee at
their meeting of April 16, 1954.
(a) A pilot grant of $1,500 was made to Columbia University
for sorting, arranging, and cataloguing the rich collection of papers of Frank Vanderlip for the use of
students. It is hoped that this grant may also encourage
Columbia to go ahead with the amassing of financial
material which will make for the establishing of a study
center for students of finance in keeping with the
position of New York's oldest and most distinguished
University.
(b) Mimeographed copies of the Selective Inventory of the
Carter Glass papers in post binders were sent on
May l8th, in accordance with the instructions of the
Executive Committee, to a list of public, bank, and
university libraries compiled by Committee members,
They were accompanied by a letter of gift which was
signed by Mr. Woodward on behalf of the Committee.
The list is appended.
(c) Data on the whereabouts of more than a hundred private
collections of papers pertinent to this project is
being duplicated and will be placed in ring binders
and distributed to the same list of libraries, with
a similar letter of gift, by June 15th. Information
which was given to the Committee as confidential was
so kept, and not included in the distributed material.
Miss Adams also reported a further move on the part of the Federal
Reserve Bank of New York toward the classifying of historical material and
coordinating responsibility for its preservation, which if adopted by the
other Federal Reserve Banks might lead to a System-wide continuing inventory
which would be very valuable to research students.
Brookings Proposal
Dr. Calkins reported on further steps in the plans outlined at recent
meetings and crystallized in the "clause of enactment" accepted at the meeting
of February 4, 1956 (in revised form dated February 17th) by which a greater
degree of administrative responsibility would go to Brookings.
Negotiations with Messrs Philip W. Bell and Raymond P. Powell of
Yale to undertake the history as a "team" failed because of the pressure of
their other commitments„
The name of Dr. Redvers Cpie, economist and financial adviser, former
Oxford, don who for seven years taught money and banking at Oxford with emphasis
on the Federal Reserve System, a former staff member at Brookings, was presented by Dr o Calkins as a possible project head or writer of monographs; it
met with a generally favorable reaction on the part of Committee members present,
Dr o Calkins reported later that it was approved in post-meeting conversation
with Mr. Sproul and with Mr. Woodward. It was agreed that further negotiations
with Dr, Opie should be undertaken by Dr 0 Calkins.
Monographs
Hackley -- Chapters forming part of the proposed Legal
History of the Federal Reserve System by Howard
Hackley were circulated and warmly approved,
Hammond -- A draft outline of the proposed monograph
on the Evolution of the Payments Mechanism by
Bray Hammond was circulated and approved. It will
be amplified before this monograph is finally
accepted„
Williams — Dr. John Williams, who is leaving his post
as advisor to the New York Federal Reserve Bank
on June 30th, is not yet ready to accept a commitment to write a monograph on Monetary and Fiscal
Policies. Dr o Calkins will try to persuade him.
Dr. Burgess suggested that to the growing list of monograph writers
be added the name of Mr. Sproul who, disposed to write after he leaves the
Presidency of the New York Federal Reserve Bank, would add quality and balance
if he could be persuaded to do so under the aegis of this Committee.
Committee Decisions
After a searching discussion of the Committee's experience, its
problems and its present position, and a report showing an estimated $225,000
remaining June 30th out of an original budget of $310,000 it was agreed that
in order to carry out its mandate from the Rockefeller Foundation the Committee
should take a further step which would transfer complete executive and administrative responsibility to the Brookings Institution with the understanding that the
Committee would continue to function, but in an advisory rather than a decisionmaking capacity. To that end, a resolution which is appended to these Minutes
was approved by Committee members present, and will be circulated to absent
members for their approval.
It was agreed that report of this action should be made to the
Rockefeller Foundation in writing and signed by the Chairman.
It was agreed that the resignation of Mr. Sproul, presented on the
ground that he was resigning from the Federal Reserve Bank of New York, and
hence from his official position in the System, and the consideration of a new
Chairman, should be postponed until after the transfer of the project to
Brookings had been effected and the report made to the Foundation. (Dr. Calkins
reported later that Mr, Sproul agreed to postpone his resignation from the
chairmanship until June 30th.)
It was agreed that in accordance with the transfer of executive responsibility to the Brookings Institution, files and research material in the
possession of the Committee should be sent there as soon as work now under way
is finished.
It was agreed that the executive director, who had offered her resignation as of June 30th, should be asked to stay until July 30th in order to
complete work in progress and the moving of files to Washington. It was understood that this commitment does not impose a full office schedule.
The meeting was adjourned at 3°30 p.m.
Respectfully submitted,
Mildred Adams
(for MTo Woodward)
STATEMENT OF FIMWCIAL STATUS
OF THE
PROJECT ON THE HISTORY. OF THE FEDERAL RESERVE SYSTEM
AS ESTIMATED FOR JUNE 30, 1956
Grants received from the Rockefeller Foundation:
January 21, 1954May 21, 1954
(for nine months)
(for five months to May 31, 1959)
$10,000.
310,000.
Total
$320,000.
Expenditures: January 21, 1954- to June 30, 1956;
Salary end Contract Payments
$ 67,551*90
Travel, Grants, Miscellaneous Expenses
Overhead
6,000.00
Total
Commitments Unexpended June 30, 1956
Balance Unexpended and Uncommitted:
$84,793.83
3,375,00
Total Expenditures and Commitments
o
11,241.93
June 30, 1956
$88,168.83
$231,831.17
COMMITTEE ON THE HISTORY OF THE FEDERAL RESERVE SYSTEM
RESOLUTION
WHEREAS, the Committee on the History of the Federal Reserve System
recognizes the following situation;
1. That it was established for the purpose of developing available
materials and a history of the Federal Reserve System;
2 O That it obtained a grant from the Rockefeller Foundation specifically for archival activities, the interviewing of experienced participants
in the System, the writing of a "definitive" history of the Federal Reserve
System, the encouragement of other monographs and essays on the history of the
System, and the editing and publication of relevant documents;
3. That the Committee has made substantial achievements in finding
and making available private collections of archival materials, in collecting
remembered incidents from older officers, and in facilitating the preservation
of important records within the System;
4 O That the Committee has in progress a promising biography of
Benjamin Strong, the first Governor of the Federal Reserve Bank of New York;
5o That after two years of effort to find an appropriate author to
undertake the "definitive" history of the System, and after numerous alternatives have been considered or attempted, and have resulted in failure, the
Committee has reluctantly concluded that a "definitive" history cannot now
be prepared under its sponsorship;
,
6. That substantial and important contributions can and should be
made through historical research to promote a better understanding of the role
of this unique System and that such contributions can be made through mono=
graphic studies that examine important episodes in the history of the System,
through essays by participants in the affairs of the System, through the most
comprehensive history that may now be feasible, and through other supplementary
publications;
7. That such a program of studies and writings, though definitely
worthwhile and probably feasible, is not regarded by the Committee as the "definitive" history originally contemplated;
8. That, therefore, the Committee should seek an understanding
with the Rockefeller Foundation which will permit and authorize the Committee
to use the funds at its disposal for a program of studies that may offer important contributions to the over-all history of the Federal Reserve System, including as comprehensive a history as possible and such monographs, essays,
or other publications as may be approved by the Committee; and that the Committee
be relieved of its obligation to bring about the writing of a "definitive" history in the usual meaning of the term;
9. That after nearly two years of experience during which the
Committee has endeavoured to exercise its administrative responsibilities as
a group, it has become increasingly clear that administrative responsibilities
for the project should now be transferred to the Brookings Institution and
that this Committee should operate as an Advisory Commmittee to the project;
10. That the Committee has previously asked the Brookings Institution
to assume larger responsibilities for initiating plans and proposals, which it
has been willing to accept, and that the Committee has confidence in the capacity of the Brookings Institution to organize appropriate studies in line
with the purposes of the project;
11. That in launching this revised research program the Institution
will need the administrative freedom implicit in the proposal herein presented,
in order to make plans and negotiate promptly with personnel, and that this
transfer of increased responsibility to the Brookings Institution is made
acute and especially desirable by reason of the resignation of the Executive
Director of the Committee on the History of the Federal Reserve System effective
at the end of July, 1956, and by the resignation of President Allan Sproul
as Chairman of the Committee at the end of June,
Now, therefore, BE IT RESOLVED That the Committee recommends to the
Rockefeller Foundation that authorization be given for the use of the unexpended funds in its existing grant for historical research and the preparation
of a substantial history, historical monographs, or other essays and documents
on the history of the Federal Reserve System.
AND FURTHER BE IT RESOLVED That the Committee request the approval of
the Foundation for the transfer of full responsibility for administering the
project to the Brookings Institution with the understanding that the Committee
on the History of the Federal Reserve System will serve in an advisory capacity
to the Institution with regard to research and writing for this project„
COMMITTEE O N THE HISTORY OF THE FEDERAL RESERVE SYSTEM
AGENDA
Committee meeting - May 28, ±956
Luncheon at I p.m., President's dining room, Federal Reserve Bank of New lork
Convene at 2 p.m.
I.
Report on Executive Committee actions, April 16th
A. Grant of $1500 to Columbia for Vanderlip papers (check sent Columbia 5/23/56)
B. Glass Selective Inventory (sent to libraries Mey 18th - replies)
C. Distribution of material on papers (in duplication process - to be sent
out June 0
II.
Report on Brookings Proposal (Dr. Calkins)
A.
Negotiations for Messrs. Bell and Powell
B.
Other possibilities
1.
0. Ernest Moore
2,
Redvers Opie
C. Monographs
1.
Commitments
a.
2.
Chandler-Strong biography under way
Approved in principle - ready for negotiation?
a. Hackley - proposed Legal History of Federal Reserve System
b. Hammond - Evolution of the Payments Mechanism
c. Williams - .Monetary and Fiscal Policies
3. Other possibilities
a.
Carl Parry on Federal Reserve System and Stock Market
III
Committee decision on Brookings Proposal
IV
Report to Rockefeller Foundation?
V
Chairman1s resignation
VI
Election of new Chairman
VII
Housekeeping details
A.
B.
Staff terminations as of June 30th (reported to Exec. Comm. April 16th)
Transfer of office and material to Brookings
OH THE HISTCHY OF THE FEDERAL BSSEfifB:
iteytp* 1956
Wamea and Addresses for Hoovenized Letter on Carter
Inventory (also for gummed labels) sane l i s t £&&•
Register of Papers
\
Miss AlTOrn !!• Sutherland
Librarian, Board of Governors of
the Federal Reserve System
Washington 85f $*C*
Miss Eleanor Di Oiaonantonio
Librarian, Federal Reserve Bank
of Boston
Boston 6 t Massachusetts
Miss Janet Bogar&tis, Librarian
Federal Reserve Bank of Hew York
33 Liberty street
Urn York 45, N.X*
\
Miss Mildred S t r a i t , ; L i b r a r i a n
Federal Hesenre %$f
Minneapolis Z$
\\
WLss Mary HacBonald, w
Federal Reserve &arm o£
Kansas City 6, Missobr&
Mas Mabel H i k e r s o%
Federal i'ieserve Bank of
Dallas 13 t Texas
i
WLBS Elisabeth Holdeiti, Librarian
Federal Reserve Bank of San Francisco
San Francisco SO, California
Mrs* Florence Hartaan, Librarian
Federal Reserve Banlc of Philadelphia
f Philadelphia i # Penns/lvaiiia
liss Ethel iOLahre* Librarian
Federal Reserve Bank of Cleveland
Cleveland l t Ohio
Miss Bess iValford, Librarian
Federal Rmersre <%nk of Eiohmond
Richmond 13 f Virginia
Hiss Linda M. JfhMton, Librarian
Federal Reserve Bank of Atlanta
3 # Georgia
liss Jo Ann Aufdenkampt Librarian
Federal ileserve Bank of Chicago
Chicago 90 t Illinois
Miss Constance VfB,ff$ Librarian
Federal Reserve Bimk of St. Louis
't» Louis Z9 Missouri
Br*'Francis L. Berkely, Jr«
Curator of Manuscripts
Alderman Library
DigitizedGbarlotteville,
for FRASER
Virginia
Lutliar R« Evan% Librarian
Ilbraiy of Congress
Washington 25, D
. David 8*
Manuscripts
^
Library of Congres^
Washington £5 f DG%
\
_ Itorard G, Fr&efeafer, Director
JS«r ¥&xte. rublic library
F±fth Avenue and4?nd Street
York 1 8 ,
H«Y«.I
.
••:/:•'
Professor Arthur IU Cole» Librarian
Bsl^er Library
Harvard Univei^ity School of Business dmini strati cm
•••,v'^-' ;
Boston 63 1 Massachusetts
- '•'• •
Librarian* Massachusetts Institute
of Technology
Cambridge, Massachusetts
.;••••. ^
Mr# ^Tsxacs f. Babb
Yal0 University
Urn Haven, Conn*
Haaes and Addresses
Librarian
Princetcai University Library
Princeton, He?? Jersey
Dr» Richard Logsdon
Director of Libraries
Columbia University
Sew York 27, N«Y,
Utearian
Ctarell University Library
Ithaca, llm torlc
Librarian
University of Pennsylvania
Library
Philadelphia 4, Pennsylvania
Mbr&rlan
University of Chicago library
Chicago 37, Illinois
Librarian
University of Michigan Library
Aan i^rbor, Michigan
librarian
d i v e r s i t y of Wisconsin Library
Madison, W i i
Librarian
University of Missouri Library
Columbia, Missouri
Kr« George r«
f Director
Bancroft Library
University of California
Berkeley 4, California
Librarian
Leland Stanford T&iverslty Library
Palo Alto # Californiaf
librarian
?anderbilt University Library
, Tennessee
librarian
ttdveisity of North Carolina
Library
Chappell Hill, North Carolina
Librarian
University of Washington Library
Seattle* 7* ashing ten
Librarian
Duke University Library
Durha% Horth Carolina
Librarian
northwestern University Libra
2vanstonf Illinois
Librarian
University of Minnesota Library
Minneapolis, Minnesota*
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MEETIMC S H I F T © FROM
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Onireraity of Pennsylvania
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Princeton University
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CETIILS VILL TOLLOV.
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C O P Y
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O
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F r R A M
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Co-, on History FR j ? J
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e.
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ffneo*! o c ^ ^
Dr. Joseph H, VlUita
AN>
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^
HILL;-I. >.r>u-.S
A l e g a l History of
*** MDIKO FUNCTIONS OF THE
FEDERAL RESERVE BAMK3
CONTENTS
CB. I.
HTHODUCTIOK
A. Purpose and Scope
B« General Nature of the Lending Authority of the Federal
Reserve Banks
C. Major Factors Affecting Development
^ :
D» Arrangement
CB.II, OBJECTIVES OF THE DISCOUNT FROHSIOKS Of IRE ORIGINAL ACT
A. Genesis and Importance
B. Legislative History
C« ffee Chief Aimi
1.
2.
3«
1*.
£•
A Market for Coma^rcial Papert
General
Lessening of Competition
Relation to an Elastic Currency
Concept of "Conanercial Paper"
Indorsement by Member Banks
B» Aid to Agriculture
E. Establishment of Acceptance Market
F. Maturities
G. Amount Limitations!
!• Aggregate Amount
2. Paper of One Borrower
H« Discount Bates
I.
Rediscounts between Federal Reserve Banks
J.
Discretion without Discrimination
K* Deferred Proposalsi
1* Advances on «Satisfactory Securities*
2. Advances to Individuals
CM. I l l ,
HSPISCQUlfT OF OQtiERCIAL PAPER
A* Scope of Chapter
B*
Heaning of "Commercial Paper":
1«
2.
3*
It*
£•
legulatory Definition
Conmercial Purpose
Self-Liquidating Mature
Effect of Collateral Security
Evidence of Eligibility
C» Trade Acceptancest
1. Separate Classification for Hate Purposes
2* Mature of transaction
3» Form
D.
Coimsodity Paper
S*
Ineligible classes of Paper
1* Permanent or Fixed Investment Paper
2. Paper Drawn for Speculative Purposes
3«
F«
Paper Drawn for Trading in Stocks and Bonds
Finance Paper
Q. Cons traction Paper
!• Maturity
X* Aacmnt Limitations t
1.
Statutory Changes
2«
Regulations and Rulings
J.
Indorsement
K-
Negotiability
C3> I ? . AGRICTTL1TTML CREDITS
A.
In General
B*
Mature of "Agricultural Paper"
C.
Maturity
CH. IV. AGRICULTURAL CREDITS (Cont*d.)
D« Amount Limitations
E.
Si#it Drafts
F.
Factors 1 Paper
G.
Paper of Cooperative Marketing Associations
H. Discounts for Federal Intermediate Credit Banks
CB, V, BACKERS' ACCEPTANCES
A* G^aeral Consideration?
1.
2,
3»
h.
Policy of Encouragement
Definition
Acceptance Authority of Member Banks
Discounting Authority of Federal Reserve Banks
B» Importation and Exportation of Goodst
!• Connection with Import or Export
2. Contract for Export and Presence of Shipping Documents
3« Geographical Coverage
C. Domestic Shipmentst
1. Extension of Law to Cover Domestic Shipments
2. Purpose of Financing
3» Shipping Documents
D. Storage of Staples?
! • Purpose of Transaction
2. Warehouse Receipts and Other s e c u r i t y
3» Place of Storage
U. Meaning of "Readily Marketable Staples 1 *
E* Dollar Exchange:
1*
2,
3.
Hatare and Purpose
Perirdssion to Accept Dollar Exchange Drafts
Designated countries
F« Maturities:
1. Maturity for Acceptance by Member Banks*
(a) Cosmercial Acceptances
(b) Dollar Exchange Acceptances
Olt V. BANKERS* ACCEPTANCES (Cont'd.)
F* Maturities*
(Cont»d.)
2» Maturity for Discount by Federal Reserve Banks
3* Renewals
$* Amount Limitationsi
1. Acceptances by Member Bankss
(a) Commercial Acceptances
(1) For One Customer
(2) Aggregate jUaount
^
Q
(b) Dollar Exchange Acceptancesi
(1) For One Bank or Banker
(2) Aggregate Amount
2« Discount by Federal Reserve Banks
^
!!• Acceptance Creotits
OH. ?I, REDISCOUNT OF WCB1D WAR I VETERANS* KOTES
Oi. VII, ADVANCES TO MEMBER BANKS
km In General
C
S«
G*
Advances o n Eligible Papers
!•
2.
3#
it*
Original Authorization
Paper Eligible for Discount or Purchase
Endorsement of Pledged Paper
Maturity of Advances
£•
Increase of Securities Loans During Life of Advance
Advances on Direct Obligations o f the United States
B . Advances o n Obligations of Government Agenciesi
E.
1. Obligations of Federal Intermediate Credit Banks
2* Farm Loan Bonds
3» Federal Farm Mortgage Corporation Bonds
k» Home Owners 1 Loan Corporation Bonds
5. Obligations Guaranteed b y the United States
!Ehe Glass-Steagall Act: A Break with the Past
W . vH«
ADVANCES TO %m>m BANKS (Cont»d.)
F.
Advances to Groups of Meraber Bankss
1«
Purpose
2. Limitations
3. Effect
G. Advances on Satisfactory Assets?
1.
2.
3»
lu
£•
Original Authorization
Extensions of Time Limit
Permanent Authorization
Emergency use Vel Non
Collateral Security!
(a) The ttSound Assets" Concept
(b) Particular Types of security
^
6« Maturity of Advances
7» Bate of Interest
CH, VIII, CHFJ3IT FOR NQKMBMBER BATIKS
A* In General
B. Credit Through Medium of Member Banks t
!• Legislative History
2. Use
C. Emergency Discounts for "Corporations8
D. Advances on Government Obligations
E. Temporary Authority for Advances on Sound Assets
CB« II, ADVANCES TO BfDIYIDUALS, CORPORATIONS, AH) PARTNERSHIPS
CH> X. I>IDUSTRIAL LOAHS
CH> XI. I8TBRDISTRICT
CH, XII«
CH, X I I I ,
DISCOIJHT RATES
RELATION! TO CREDIT POLICES
• I
c
APPEHDIX?
A* Court Decisions Regarding Rights and Obligations as to
Discounted Paper
B* Present Statutory Provisions
C« Fresant Regulation A
•O
0
DRAFf
^"^
A Legal History
ffiB LEKDINO FUHCTIQIiS OF THE FEDERAL RESERVE BANKS
CHAPTER I .
A.
IHTRODUCTIOK
PURPOSE AND SCOPE
This study does not purport to be an economic t r e a t i s e . The
^
significance of t h e lending functions of the Federal Reserve Banks a s
they affect the banking system and the national economy generally has
been d e a l t with often and adequately by competent a u t h o r i t i e s . The
•conomic aspects cannot, of course, be e n t i r e l y excluded from any
^^
treatisent of a subject t h a t f a l l s e s s e n t i a l l y i n the econos&e f i e l d |
but they are not the theme of "tills discourse.
The purpose of the
present study i s to trace the legal history of the lending functions
of the Reserve Banks, i n other words, to r e l a t e t h e story of these
*±
functions from the lawyer's, rather than the economist's, point of
view.
:
I t is hoped that this will be borne in mind by any non-lawyer
who may feel that too l i t t l e attention is paid to the economic and
banking factors.
The term "lending functions" is used here rather than
Miscount functions" because, s t r i c t l y speaking, the Reserve Banks make
loans not only through discounts but also by means of advances. The
term "credit functions" would likewise be inapt because open market
purchases, which provide additional credit to the banking system, art
not within the scope of this history) it deals rather with loans in
specific instances to particular member banks or other borrowers.
Although the lending provisions of the original Federal
Heserve Act of 1913 were regarded as among the laoet iiaportant provisions of that Act, they were relatively brief* In general, they did
little more than authorize the Federal Reserve Banks to discount for
their member banks short-term CQHmurcial paper. Over a period of
nearly half a century, however, those provisions have been expanded
by numerous aaft&dtaente to the law, steaming from a wide variety of
reasons and with various effects*
In its administration of the law, the federal Reserve Board
has had to iiiui and modify from time to time regulations relating to
discounts and advances by the Federal Reserve Banks. The Board's
earliest regulations dealt with this subject* In fact, when the Board
in 1915 began designating its regulations by letters of the alphabet,
it assigned the letter "A" to its regulation relating to discounts.
Regulation A has since undergone numerous amendments and revisions,
either because 01 changes in the law or for technical or other reasons*
The jaost recent revision in 1955 resulted, not from amendments to the
law (there have been none in over 20 years), but from a weed to restate
and clarify general principles governing the discounting function.
In addition to the issuance of regulations, the Board has
been called upon frequently to interpret the discount provisions of
the law. Thia was particularly true during the 1920»s when member
-3banks were making extensive use of the discount facilities of the
Reserve Banks• About one-fourth of the Board's 1937 "Digest of
Rulings1' was devoted to this subject.
Finally, the discount provisions on occasion have been
interpreted or applied by the courts, although mat of the court
decisions have dealt with the rights and liabilities of the Reserve
Banks with respect to discounted paper rather than the construction
of provisions of the Federal Reserve Act.
It is with all of these legal phases of the isatter that this
study is concernedi
changes in the law and the reasons behind the»j
regulations of the Board under the lawj published interpretations of
the Board$ and court decisions* As previously indicated, economic
considerations | however important they may be, are only incidental to
the purposes of this study* Similarly, the operational aspects of
Federal Reserve lending functions - how discounts and advances are
processed by the Reserve Banks, the relative volume of the different
types of discounts and advances, etc. - are beyond the scope of the
present investigation.
B. GEHERAL NATURE OF W E LEHBIKG AUTHGRITX
OF ffiE FEDERAL RESERVE BANKS
As a preliminary to a discussion of the development of the
lending authority of the Federal Reserve Banks, it is desirable to have
in mind a general picture of the nature of that authority under present
law. Briefly stated, the Reserve Banks now have power under the law •
1, To discount for member banks commercial paper
f1 eligible paper") having a maturity of not more than
90 days at the time of discount;
2« To discount for member banks and Federal
intermediate credit banks agricultural paper with
maturities up to nine months;
3« To discount for member banks bankers1
acceptances which arise out of the importation or
exportation of goods, domestic shipments of goods, or
the storage of readily marketable staples, or which
are drawn to create dollar exchangej
h* To discount "factors* paper" and sight drafts
growing out of shipments of readily marketable staples*
5* To make advances to member banks on their own
notes secured by "eligible paper" or by obligations of
the United states or of certain Government agencies;
6* To make advances to member banks on the
security of any assets satisfactory to the lending Reserve
Bank, but at a rate one-half of one per cent higher than
the regular discount rate;
7» to make emergency advances to "groups* of
member banks;
8* To stake advances to any individual, partnership
or corporation (including any bank), but only on the ••curity of direct obligations of the United states;
9« In unusual and exigent circumstances and only
under special authority from the Board, to discount
eligible paper for individuals, partnerships, or corporationsj
10*
to make direct advances to business enterprises
for working capital purposes, and to enter into oojaaxtaients
with financing institutions vith respect to such a&raneesj
and
11. With the permission of the Board, to rediscount
the discounted paper of other Reserve Banks,
fhe above grants of authority are subject to limitations and
restrictions which will be discussed later at the proper places in
this study*
In addition, there are certain general limitations in the
law which must be noted. Thus, the aggregate amount of paper of any
one borrower which may be rediscounted for a member bank may not exceed
the amount which that borrower could lawfully borrow from a national
bank - in general, 10 per cent of the bank's capital and surplus* A
member bank may not act as the medium or agent for a nomeatber bank in
obtaining Federal Reserv© credit, except with the permission of the Board.
Finally, under section h of the Act, a Federal Reserve Bank in granting
credit accommodations must give ndxua regard* to the claims and demands
of other member banks, the maintenance of "sound credit conditions",
and the accommodation of commerce, industry, and agriculture*
Each Reserve Bank is authorized to establish from time to time
rates of discount to be charged for each class of paper, subject to
review and determination by the Board*
Over all, the discounting authority of the Reserve Banks Is
subject to such limitations and regulations as may be prescribed by
the Board and to the Board's authority to determine or define the
character of paper eligible for discount.
from the point of view of form, &ie Federal Reserve Banks
extend credit either by discounting paper made eligible by the law,
or by staking advances on notes secured by specified collateral.
Originally and traditionally the standard method was by way of dis~
counts* In recent years, however, Federal Reserve credit ha« usually
been in the form of advances, due chiefly to the large amounts of
Government obligations held by member banks and the availability of
such obligation as security for advances on notes of member banks*
^ e recipients of Federal Reserve credit are, of course,
primarily banks - national and State - which are ©embers of the Federal
Reserve System*
This is as it should be. Access to the credit facili-
ties of the Federal Reserve Bante has always been considered one of the
principal advantages of membership in the System. However, the original
Act contemplated that in some circumstances and with the permission of
the Board these facilities might be indirectly available to nonmember
banks as well. In 1932, as a farm credit measure, the discount window
was opened to federal intermediate credit banks. Since 1932, business
enterprises, corporations, partnerships, and even individuals have been
given access to Federal Reserve discounts or advances, although only in
emergencies or at least in limited or unusual circumstances*
Again, the subject may be considered from the standpoint of
the kinds of assets that may be used as a basis for credit, whether
a discount or an advance. The orthodox view at the time of enactment
of the Federal Reserve Act was that only short-term self-liquidating
paper growing out of actual commercial transactions should be admitted
to discount. In large part this view grew out of the concept that an
»elasticw currency should be based on such paper in order that currency in circulation would rise and fall in accordance with the credit
demands of business and cosanerce. The orthodox view still colors the
discount provisions of the law. However, even the framers of the Act
were willing to permit the discount of longer-term paper where it was
drawn for agricultural purposes or -where it took the form of a bankers'
acceptance. Amendments to the law have authorised the use of Government obligations as collateral for advances} and since 1932 member banks
have been permitted to borrow from the Reserve Banks, although at a
higher rate of interest, on the basis of any Msatisfactory* assets
whether self-liquidating or not. Under present conditions, when member
banks borrow at all it is normally on their own notes secured by direct
obligations of the United States*
^
bas
* c purposes of the various statutory provisions
authorizing discounts and advances are not explicitly stated in the law,
although the law makes it clear that the Reserve Banks are not to
extend credit for speculative purposes or for purposes inconsistent
with the maintenance of sound credit conditions* In general, however,
i t may be said that the provisions for discounts and advances have two
main purposesi
F i r s t , to provide temporary assistance to member banks
In normal times to enable them to adjust their asset positions when
necessary because of such developments as a sudden withdrawal of
deposits or because of seasonal requirements; and, second, to provide
c r e d i t , even on a long-term b a s i s , i n emergencies or times of unusual
stress.
Of the f i r s t type are the basic provisions of section 13
which authorise discounts f o r , and advances t o , member banks on the
basis of e l i g i b l e paper or Government bonds*
Of the second type are
the provisions of section 10(a) and 10(b) of the Federal Reserve A©t
and those provisions which authorise extensions of Federal Reserve
credit in limited circumstances to noranember banks, business enterprises,
corporations, partnerships, and individuals*
fhe fundamental and o v e r - a l l objective of the lending
functions of the Federal Reserve Banks, as stated by the Board i n the
Foreword to i t s Regulation A, i s to "aeeos&odate commerce, industry,
aiid agriculture* and t o advance the public i n t e r e s t •by eontrtfcufcitig
to the greatest extent possible to economic s t a b i l i t y and growth**
C.
114JOR FACTORS AFFECTING DEfELOFKEUT
While i t i s important to understand the nature of the statutory
provisions authorising discounts and advances by the Reserve Banks, i t
i s also important - and more i n t e r e s t i n g - to understand why and how
these provisions were put into the law, and this i s largely the theme
of the present study*
•9Over the years of the System's existence, the relative
importance of the lending function has varied from tiiae to timej
emphasis has shifted from one phase to another; and concepts have been
changed or modified,
the factors that have led to these developments
have been numerous, and they -Hill be examined in detail in the following chapters*
I t i s worthwhile, however, to have in mind, from the
beginning, at least four ma^or factors which have been largely responsible
for the expansion of the lending authority of the Reserve Banks beyond
their original simple authority to discount commercial paper for member
banks*
In the f i r s t place, the drop in farm prices following
World War X and the acuta demand for additional agricultural credit
led to amenctaents to the Federal Reserve Act liberalizing the authority
of the Reserve Banks to discount agricultural paper*
Secondly, an active movement to promote the foreign trade of
the United States, which had already begun a t the time of enactment of
the original Act, led to the broadening of the provisions of the law
relating to bankers* acceptances and the rediscounting of acceptances
by the Federal Reserve Banks.
A third and extremely important factor mas the general
economic depression of the early 1930*8 which culminated in the banking
crisis of 1933* In order to revive confidence, drastic amendments
were made to the law for the purpose of making Federal Reserve credit
more available not only to member banks but to nonmember banks and
business corporations*
finally, changes in bank lending practices have materially
affected the concept of the kinds of paper acceptable as a basis for
Fedaral Reserve credit. With gfsattr volumes of savings deposits*
banks in recent years hare invested more of their funds in mortgages
and other long-term loans, and there has been a consequent shrinkage
in the relative amount of short-teim "cois&ereial" paper held by banks.
This development has been accompanied by increased emphasis on the
"soundnessR of paper offered for rediscount as against compliance with
the formal requirements for eligibility laid down by the framers of
the original Federal Reserve Act.
these fo\ir factors are the key to an understanding of many
of the more important changes which have taken place in the lending
activities of the Federal Reserve Banks. In addition, it should be
noted that in recent years it has been recognized more clearly that
these activities are not merely localized in their effect but have an
important bearing on the effectiveness of System credit policies.
D.
ARMMCEMEK?
The lending functions of the Federal Reserve Banks have many
facets and a purely chronological account of their development would
be disconnected, complicated, and extremely confusing* At the same
time, it seems desirable to present this history in a way that will
Mike it clear how these functions have steadily and naturally expanded
through the years. Accordingly, the plan of this study Is something
of ft compromise between a chroaological and a topical arrangement.
Bach aspect of the subject is dealt with in a separate chapter,
although the cb&pter say cover the entire period of the System1 g
existence* but the topics of the several chapters are arranged roughly
in the order in which they assumed importance chronologically*
Thus,
while advances to member banks on Government bonds were first authorised
in 1916, It was not until 1932 that advances, as distinguished from
rediscounts, attained real significance) and consequently the chapter
on advances follows those on agricultural credits and bankers* acceptances •
The following chapter will attempt to analyse the principal
objectives of the original discount provisions as indicated by the
legislative history of the Federal Reserve Act in 1913*
thereafter,
successive chapters will consider!
(1) the discounting of "commercial paper" for
member banks|
(2) agricultural credits*
(3) bankers' acceptances;
(it) discounts of notes secured by World War I
veterans* adjusted service certificates)
(5) advances to member banks)
(6) credits for nonmember banks)
(7) discounts for, and advances to, individuals,
partnerships, and corporations)
(ft) advances and commitments for business enterprises;
(9) rediscounts by the Federal Beserve Banks for
each other;
(10) discount rates} and
(XX) the relation of the lending functions of the
Reserve Banks to System credit policies.
In an Appendix there is included a general discussion of
decisions of the courts relating to the rights and liabilities of the
Federal Reserve Banks with respect to discounted paper. The Appendix
also contains the discount provisions of present law, the text of the
Board1s present Regulation A, and, for reference purposes, lists of
the statutes amending the discount provisions of the Act, the various
circulars and regulations of the Board, and citations to court decisions.
CHAPTO Iy> AQRXCtflffflRAl, CREDITS
One of tii© special objectives of the discount provisions of
the original Federal Reserve Act was to provide a market for agricultural paper.* In describing paper e l i g i b l e for discount seetion 13 of
the Act s p e c i f i c a l l y referred t o paper issued or drawn for agricultural purposes.
^
I t provided that nothing i s the Act should be eon-
strued as prohibiting the discount of paper secured Isy "staple
• ^ . c u l t u r a l products^"
I t even gave a certain preference to agri-
cultural paper by permitting the discount of such paper tilth a aaturlty
up to 6 months instead of the 90-day maximal maturity prescribed for
^
other types of paper.
The Federal Reserve Act, however, was not a *fana credit*
act*
Proposals lor a long-range system of f a m credits* which had been
made before 1913, did not reach l e g i s l a t i v e fruition until the enactA
ment of the Federal Farm Loan Act i n 1916.
Following the pattern of
the Federal Reserve System, that Act s e t up twelve Federal land banks
and provided for the voluntary formation of joint-stock land banks and
national farm loan associations,
the land banks were authorized to
make faim mortgage loans with maturities of not l e s s than 5 and not
acre than 1*0 years•
The whole system was placed under the supervision
of a Federal Farm Loan Board* No change was cade i n the discounting
authority of the Federal Reserve Banks} but both the Reserve Banks
*
See Chapter I I , p»
and member banks of the Federal Reserve System were specifically
2
authorized to buy and sell farm loan bonds issued by the land banks*
Dining World War I, the farmers had little or no financial
problems. In 1920, however, when deflation set in, far© prices dropped!
and the need for greater agricultural credit became acute,-*
In 1921, the War Finance Corporation was revived i&th
^
W
authority, aaiong other things, to provide loans for agricultural purposes* That Corporation made a large volume of loans to farmers,
livestock companies, and cooperative marketing associations; but it was
merely an eaergency agency. There was a gamming sentisent in favor
of a more permanent system of fans credits designed to meet the n intermediat** credit needs of the farmer - loans with maturities less than
c •
^•^
the 5-year minimum maturity permitted by the Farm Loan Act and yet
longer than the 6-ffioriths maturity prescribed for the discount of agricultural paper by th© Federal Reserve Banks* The growth of this
sentiment led to the enactment of the Agricultural Credits Act of 1923*^
The chief advocates of the new farm credit legislation in
Congress mm senators L«nroot and Capper and Chairman McFadden of tht
House Banking and Currency com»itt«e.
Outside of Congress the principal
impetus probably came from Eugene Meyer, at that time Managing Director
of th© far Finance Corporation and later to become Governor of the
Federal Reserve Board. Actually, Meyer f e l t strongly that the best
way to help the agricultural interests was to induce more country
banks to become members of the Federal Reserve System.0 However, he
**"
urged the enactment of the fans credit b i l l as a comprehensive neasure
to meet the problems and difficulties that had cose to the attention
7
of the war Finance Corporation In connection with agricultural credits*
the Agricultural Credits Act set up twelve Federal i n t e r mediate credit banks with authority to make agricultural and livestock
loans with maturities of from 6 months to 3 years* I t provided further
for the voluntary organization of "national agricultural credit corporations" which, under regulations of the Comptroller of the Currency,
W
were authorised to iaake loans on agricultural paper with a maturity of
not rare than 6 months and on livestock paper with a maturity up to
3 years| and xaember banks of the Federal Reserve System were authorised
to purchase stock in these corporations.
^
provided by the statute.
Such was the new machinery
In addition, certain amendments w©re mad© to
the existing farm credit provision* of the Federal Far* Loan Act and
the Federal Keserrs Actj and i t Is Hie l a t t e r vifrieh are of particular
interest here*
^
The general objective of the 1023 amendments to the Federal
Reeerve Act was to stale* eligible for discount certain types of agricultural paper which previously had not been eligible either because
of Hie maturity limitations or because of other limitations of the law
as they bid been Interpreted by the Board* The maturity requirements
were liberalised both for agricultural paper generally and for bankers'
acceptances based en agricultural transactions.
"Sight* or demand
drafts drawn to finance domestic shipments of agricultural products
were xaade eligible for discount, as were also drafts of "factors"
drawn to finance producers of staple agricultural products. A new
section 13a was added to the Federal Reserve Act, dealing specially
with the discounting of agricultural paper for Federal intermediate
credit banks and cooperative marketing associations* 411 of these
changes will be discussed in subsequent sections of this chapter*
As stated by senator capper, who sponsored the bill in the Senate,
the purpose of these provisions was "to make such changes in the rules
of eligibility governing agricultural paper as seem necessary to fit
the actual requirements of the fanner."fi
In the opinion of Eugene Meyer, the amendments to the
discount provisions of the Federal Reserve Act were the isost important
is the bill,9 m
s
statement before the House Banking and Currency Com-
mittee regarding adjustment of the Federal Reserve System to meet
changing conditions is well worthy of quotation becauie^c^'lts- applicability, not only to the agricultural credit functions of the System*
but to the System's functions in general!
*# # # The adjustments contemplated are in line
with the experience of the last few years, and their
purpose is sitrely to adapt the Federal reserve system,
86 far as agriculture is concerned, to changed conditions* Those who object to adjusting the eligibility
rules of the system to the tia© required for the orderly
•arketing of agricultural products under present conditions seem to fear that the soundness of the system say be
jeopardized. But the system suffers from friends as well
as from foes. Those who defend its every act and policy
and who stand for the immutability of its present law
and regulations may be as harmful as those who are extres*
in their denunciation of the part played by it In the
collapse of commodity markets and prices. The true friends
of the Federal reserve system are those who are willing to
see its machinery adjusted along sound lines to meet changing
conditions| both in this country and abroad."
Shortly after the enactment of the Agricultural Credits Act
of 1923, the Board in a published statement reviewed and explained the
increased fara credit facilities provided by that Act* In general the
Board m%4 that it had "so construed and administered the law as to
improve* in th© highest possible degree, the credit standing and economic
position of the a^r5cultural interests, placing at tfeei? disposal,
through Its discounts for member banks &n& its open-market operations,
the vast resources of the Federal reserve system to the fullest extent
permitted by the law and by the principles of sound banking."
Since 1°23> Congress has enacted numerous statutes to provide
further credit assistance to agriculture, including, among others, the
yarn Credit Acts f 1933 and 1937, and the Federal Farm Mortgage Cor**
poration Act of 193U. However, no substantial changes in the authority of the Federal Reserve Banks to discount agricultural paper
have been made since the liberalising amendments made by the Agricultural Credits Act of 1923. There have been amendments to the law
authorizing advances by the Reserve Banks to member banks on the
security of obligations of Federal intermediate credit banks and
other Federally established organisations to provide agricultural
creditj but a discussion of these amendments* vshile relating to
farm credits, more properly belongs in a later chapter dealing with
advances to meaber banks on their secured notes*
In general, discounts of agricultural paper are subject to
the same terms ami conditions as those applicable to discounts of
eoaoercial paper, as discussed in Chapter III> including requirements
with respect to endorsement and negotiability and limitations on the
amount of paper of one borrower which say be discounted for any member
bank* The one important exception relates to maturity; and the more
liberal maturity requirements applicable to agricultural paper will be
discussed in a following section* First, however, i t is necessary to
consider the nature of »agricultural paper.*
B. «AOTE OF
the Federal Reserve Act i t s e l f did not undertake to define
«agricultural papern or *agricultural purposes*, although i t iaad* i t
clear that paper based on livestock was intended to be covered* More
specific description was l e f t to the discretion of the Federal Reserve
Board*
In 1915> in a separate regulation pertaining to agricultural
paper,
12
the Board stated merely that paper issued or drawn for
agricultural purposes or based on livestock meant paper the proceed*
of which had been uaed or were to be used for agricultural purposes,
"Including the breeding, raising, fattening, or marketing of live
stock.tt After the passage of the Agricultural Credits ^ct of 1923,
the Board in « revised regulation3^ sore particularly referred to
paper drawn for, or Hie proceeds of which were used for, n the production of agricultural products, the marketing of agricultural products
by the growers thereof, or the carrying of agricultural products by
the growers therof pending orderly marketing, and the breeding, raising,
fattening, or marketing of live stock." The so&e language is contained
in Regulation A today.
As will be noted later, paper of cooperative
marketing associations h?s been specifically declared to constitute
agricultural paper if it meets certain requirements. Otherwise, the
Board has not attempted by regulation to describe agriculture paper in
any detail.
In some early published interpretations, however, the Board
was called upon to determine whether certain types of paper were
agricultural, as distinguished from commercial, paper* The need for
making this distinction arose, of course, from the more liberal
maturity requireaent prescribed by the law for agricultural paper*
The Board announced that the basic test is whether the
coiasiodity for the purchase of which a note is given will actually be
used for agricultural purposes. Even though the commodity itself is
of an agricultural nature, the note is not «agricultural paper11 if the
purchaser does not intend to ase It for an agricultural purpose*
Thus, purchase of such a comaodity for the purpose of resale is not
16
sufficients
in such a case the paper must be treated as commercial
rather than agricultural paper•
However, as long as the commodity
is actually to be used for an agricultural purpose by the purchaser,
the note given by him may be considered agricultural paper, whether
18
discounted by the maker or by the seller-indorser.
As specific examples, the Board has ruled that notes given
19
for commercial fertiliser,
agricultural implements,
20
tractors used in agricultural operations,
and the draining and tilling of farm land
say be considered agricultural paper.
Livestock paper, that is, paper to finance the breeding,
raising, fattening, and marketing of livestock, has always been included
111 the definition of agricultural paper. ^ in fact, one of the principal purposes of the Agricultural Credits Act of 1923 was to provide
needed credit to breeders of livestock*
For this purpose, the Board
oh
held that cows, horses, and mules are livestock*
However, notes
given by dealers in cattle and mules are commercial rather than agri-
cultural paperj
&& *&& notes of a packing company given for the
purchase of livestock to be slaughtered are not notes "based on live
stock" within the meaning of the law* ^
The original Federal Reserve Act allowed a maxim© maturity
of 6 months for agricultural paper, as contracted idth the 90~day
maturity requirement applicable to a l l other types of paper.
This
allowance was made* however, with no intent to single out agricultural
paper for special favor but simply in recognition of the fact that the
marketing of fara crops and livestock normally requires a longer period
of financing than ordinary commercial transactions* liven a 6-months
limitation soon proved to be inadequatej and the Agricultural credits
Act of 19^3 increased the maturity requirement for agricultural paper
to 9 months*
Apparently, this increase in the maturity requirement for
agricultural paper was prompted largely by the contention of representatives Q£ livestock associations that the then existing 6-montha
limitation was not adequate to provide assistance to breeders, as dis27
tinguished from raisers, of livestock*
the Senate Banking and
Currency Committee felt that the longer period of maturity "would be
helpful and was in some cases necessary", and that such a lengthening
of the maturity of agricultural paper would in no way impair the
liquid character essential to Federal Reserve Bank discounts*
Congress agreed with those **!» control of the Federal r^Ber^m system*
that paper having a maturity of more than 9 months should not be
eligible for discount because the paper rediscounted by the Reserve
-10Banks "must be self-4iquidating« w 29
Ae a safeguard, the Senate Banking
and Currency Committee inserted a new restriction against the use of
paper with maturities greater than 6 months as security for Federal
Reserve notes, unless the paper was secured by warehouse receipts or
30
security docuiaents or chattel raortgages on livestock•
In addition to increasing the maturity prescribed for the
discount of paper drawn for agricultural purposes, the Agricultural
Credits Act of 1923 increased the maturity prescribed by section 13
of the Federal Reserve Act for the discount of bankers1 acceptances
from 90 days to 6 months where the acceptances were for agricultural
purposes and were secured by t i t l e doeusiente covering readUgr marketable
staples*
the federal Eeserve Board had previously ruled that agricul-
tural acceptances with maturities up to 6 months could be purchased
by the Federal Reserve Banks i n the open market} and congress f e l t
that there was no reason "why such acceptances should not be given
the f u l l benefit of the rediscount privilege» w
D.
AMOUNT LXKttYIONS
fhe longer maturity permitted for agricultural paper was a
concession to the orthodox doctrine that only short-term paper should
be e l i g i b l e for discount! and Congress made the concession with *
qualification.
To prevent the discounting of long-term agricultural
paper in excessive amounts* the original Federal Reserve Act provided
that discounts of such paper should be limited to a percentage of the
capital of the discounting Federal Reserve Bank, **to b® ascertained
and fixed by the Federal Reserve Board •«*
Pursuant to this provision, the Board by regulation limited
the aggregate amount of such paper with a maturity of more than 3 months
and less than 6 months which each Federal Reserve Bank might discount
32
to 25 per cent of the Reserve Bank's paid-in capital*
At the same
time the Board indicated that In those districts in which 6-months
paper was particularly required to carry through agricultural opera**
tions, the 2$ per cent limit would be increased from time to time upon
request of the Federal Reserve Banks.JJ
°
In 1916, Congress sought to make the statutory limitation
store liberal by basing i t on a percentage of the assets, rather than
the capital, of the discounting Federal Heserve Bank*^* S t i l l later
the Agricultural Credits Act of 19?3 authorized the Board by regulation to limit the amount of paper with a maturity of from 3 to 6 months
and from 6 to 9 months which might be rediscounted by a Federal Reserve
;
•
:
•
•
•
• " .
Bank. Pursuant to these changes i a the lav, the Board in i t s 1923
revision of Regulation A provided that there should be no amount limitation on the discount of paper with a maturity of more than 3 months
and leas than 6 months, but that the aggregate amount of discounted
agricultural paper with a maturity of between 6 and 9 months should not
exceed 10 per cant of the total assets of a Federal Reserve Bank.
While
lilt authority for such limitations i s s t i l l in the law, the limit fixed
by the Board in 1923 was omitted from Regulation A in 1937; and no such
ajaount limitation i s now in force.
I t i s to b© borne in mind, however, that agricultural paper
continues to be subject to the same limitations on the assount of paper
of any one borrower which may be discounted for a member bank as those
Applicable to the discounting of other types of paper. These limitations have been discussed in a previous chapter.*
B. SIGHT DRAFTS
Drafts payable at sight or on demand have no fixed maturity
and may not actually be presented for payment within 9Q days, or even
within 6 or 9 months. Such drafts, therefore, could not meet the fixed
maturity requirements prescribed by section 13 of the Act as a condition to rediscount by the Federal Reserve Banks* I t was the custom,
however, for many laember banks during crop-iaoving periods to discount
large volumes of si^it drafts secured by bills of lading covering the
shipment of wheat, cotton, or other agricultural products! and these
drafts, although having no fixed maturity, were usually paid with
promptness and were considered a liquid and desirable form of paper*
Accordingly, the Board recommended to Congress that the law be amended
to make such drafts eligible for rediscount by the Reserve Banks under
certain conditional
Such an aaendiaest was made by the Agricultural Credits Act
' of 1923*
It extended the discount privilege to bills of exchange
payable at sight or on demand if drawn to finance the domestic ship-*
sent of "nonperlshablQ, readily marketable staple agricultural
products" and if secured ty bills of lading or other shipping documents
# See Chapter III, p.
conveying or securing title to such staples* It was provided, however,
that all such bills should be forwarded promptly for collection and
that demand for payment should be mde with reasonable promptness after
the arrival of the staples at their destination* and no such bill
eouLd be held by or for the account of a Federal Reserve Bank for mr*
than 90 days* In discounting such sight bills the Reserve Banks were
authorised to compute the interest to be deducted on the basis of the
estimated life of the bill and to adjust the discount after payment of
tfe© bill to conform to its actual lif®.
Five years later, In 1928, the provision was expanded to
permit the discounting of sight bills covering nonagricultural as
well as agricultural staples and covering the exportation as well as
the domestic shipment of such staple a*38
In its 19^3 revision of Regulation A, the Board followed
generally the language of the law with respect to discounts of sight
or demand bills;-*" and the regulatory provisions on this subject remain
substantially the same tod ay. ^°
As to what constitutes a "readily marketable nonperishable
staple*, the Board stated in 1923 that it did not deem it advisable
to formulate a comprehensive definition and that the Reserve Banks should
exercise their discretion 1 B the matter.
la specific instances, how-
ever, the Board held that cottonseed should be,
should not be,
and cottonseed oil
considered readily marketable staples for this purpose.
As has been noted, the statutory provisions were changed in 1928 to
eover nonagricultural as well as agricultural staples*
When Regula-
tion A was revised in 1937* i t carried a footnote stating t h a t , id thin
the meaning of the Regulation, a readily marketable staple meant Han
a r t i c l e of commerce, agriculture, or industry of such uses as to make
I t the subject of constant dealings in ready markets with such frequent
quotations of price as to make (a) the price easily and definitely
ascertainable arid (b) the staple i t s e l f easy to realise upon by sale
a t any tia* •»**** t h i s definition followed a similar definition which
had previously been adopted by the Board for the p\irpos© of detenaining
the e l i g i b i l i t y of bankers' acceptances growing out of the storage of
readily marketable staples) and the scope of the tern will be considered further i n a l a t e r chapter relating to the discounting of
bankers* acceptances**
;
^
F.
FACTORS* PAPSB
During the hearings on the Agricultural credits Act of 1923,
M^etm Meyer pointed out t h a t , in addition to sight b i l l s , another
class of agricultural paper had theretofore been ineligible for d i s count because of rulings of the Federal Reserve Board*
The Board had
held that so-called "finance" paper the proceeds of which were to be
loaned to third persons was not eligible for discount** *0n t h i s theory,
the paper of cotton "factors", who carried cotton for t h e i r customers
v&til the cotton was sold, could not be offered for discount.*4?
Governor Meyer f e l t that this was a "hairsplitting" distinction. 4
•
See Chapter ? , p#
•*
See Chapter I I I ,
-15Congrees apparently agreed with Governor Meyer. The
Agricultural Credits Act of 1923 amended the second paragraph of section 13 of the Federal Reserve Act to provide expressly that nothing
in that Aet should be construed to prevent "the notes, drafts, and bills
of exchange of factors Issued as such making advances exclusively to
producers of staple agricultural products in their raw state" Iroai
being eligible for discount* A paraphrase of this provision was in*»
corporated in the Board's 1923 revision of Regulation A$
and a similar
provision appears in the present regulation.^"
It i s to be observed that this provision relates only to
factors 1 paper drawn to finance producers of agricultural products "in
their raw state." Thus, the Board held that, if the proceeds of a
cold-storage company's notes were to be used for making advances to
producers of eggs and poultry, the notes would be eligible for discount, but that butter is not an agricultural product in i t s "raw
state" and consequently notes covering advances to those engaged in
the commercial production of butter froa erean purchased from others
••'•
.
-'
Wft
would not be eHgi^Le for discount.
Some years later, as noted in the previous chapter, the Board
reversed i t s general position regarding the eligibility for discount
of "finance" paper.
Ofcder i t s present Regulation A, therefore, not
only agricultural factors 1 paper but any paper the proceeds of which
are to be loaned to third persons aay be eligible for discount i f the
proceeds are ultimately to be ws9& for coiazoercial, agricultural, or
industrial purposes.
•••••••:•
-46-
0, PAPBK OF COOPERATIVE HARIEIIHO ASSOCIAflOHS
B y 1923, cooperative marketing associations bad assmaed
considerable importance as agencies for enabling farmers to market
their crops to better advantage.?® normally, such associations were
non-stock organisations whose members consisted of the producers of
the particular crop which the organization was designed to market and
to which Use members delivered their crops for sale* The commodities
were pooled according to grades and after all of a particular pool
had been sold by the association the proceeds were distributed pro
rata to the producers who had contributed to that pool,-*1
In a number of rulings prior to 1923
the Board had held
that in sons circumstances notes of cooperative marketing associations
were eligible for discount as agricultural paper, but that in other
circumstances such notes were not eligible for discount or were eligible
only as commercial paper and therefore must have a maturity of not
more than 90 days* For ©xaajple, the Board had held that notes of an
association engaged in packing and marketing products not grown by it*
self, the proceeds of which were used to pay current expenses and to
purchase supplies* were eligible for discount only as eooaereial
paper.
the Agricultural credits Act of 1923 recognized the essential
agricultural nature of cooperative marketing associations and, as
stated by Eugene Meyer, "swept away* technical distinctions based on
the legal form in which their paper was issued.
In a new section 13a
added to the Federal Reserve Act, it was provided that notes, drafts,
and bills of exchange issued or drawn by *uch associations should be
»deeaed* to have been issued or drawn for an agricultural purpose if
their proceeds (l) were advanced to their members for an agricultural
purpose, (2} were used to make payments to members for agricultural
products delivered to the associations, or (3) were used to meet expenditures incurred in connection with the grading, packing, preparation for
market, or marketing of any agricultural products handled by the
associations for their members*
After the enactment of the Agricultural Credits Act of 1923
the Board published a revised statement of general principles affecting
the discount of paper of cooperative marketing associations.
Araong
other things, this statement made it clear that the following types
of paper wuld be eligible for discount as agricultural papert growers1
drafts accepted by the associations covering deliveries of crops, if
the proceeds vert used by the growers for agricultural purposes?
growers* paper used to finance the carrying of their products for &
reasonable period incident to orderly marketing; and paper of the
associations to finance the packing and marketing of the products of
their members, to pay for products purchased from their members, or to
make advances to their members for agricultural purposes*
In its Regulation A, the Board followed the language of the
mmeAtA law as to the eligibility of paper of cooperative marketing
associations for discount} but, in addition, the Regulation provided
that such paper would not be eligible if the proceeds were used to
defray expenses of organising the association, or to acquire warehouses
or purchase or improve real estate or other fixed or permanent investasats.* 6
H. DISCOUNTS FOR FEDERAL mSmmUU
CREDIT BkWSS
Ae noted at the beginning of this Chapter, the Agricultural
Credits Act of 1923 set tip a system of Federal intermediate credit
banks to provide credit to farmers with maturities ^intermediate*
between the short-term credit available through the Federal Reserve
Banks and the lon£-terra credit obtainable from the Federal land banks.
The intermediate credit banks were authorised to discount agricultural
and livestock paper for State and national banks, agricultural credit
corporations, livestock loan companies, and cooperative marketing
associations, and to make direct loans to cooperative marketing associations.
The maturity of all such discounts and advances was limited to
ft minimum of 6 ninths and a maximum of 3 years*
In turn, the Federal intermediate credit banks were permitted
to rediscount their paper with the Federal Reserve Banks on the ease
basis on which agricultural paper generally could be offered for discount
to the Federal Reserve Banks, thus, to be eligible for discount, such
paper had to be indorsed by the intermediate credit bank and had to have
a maturity at the time of discount of not more than 9 months, exclusive
of days of grace, subject to the right of the Federal Reserve Board
to limit the amount of 3 to 6 isontiis1 paper and 6 to 9 months'
'
v
paper whieh sight be redlsecmBted fey a Federal Heeerte Bask* 2B addi~
tion, the new law specifically provided that DO B©s@nr© Bank should
rediscount for a Federal intermediate credit bank mj note bearing the
indorsement of a B0fi»@«l3@r State uhlcfi which was eligible for membership in the Federal Reserve System.
••' fids was the f i r s t Instance in which the discount f a c i l i t i e s
of the Federal Reserve Banks were mad© available to any but member
banks of the Federal Reserve System,
:
In addition to authority to disoount paper for tl-i© iiiter-
laediate credit banks, the Agricultural credits Act of 1923 gave the
Heserv® Banks authority to buy and s e l l deb®ntur#s and other saeh ob*
ligationa issued by the p^deral interEiediat« credit banks or % tlxe
national agrlcvl-biral credit corporations provided for in the mm* Act,
but only subject to the same limitations as those applicable to tha
p\irchas© and sale of fans, loan bonds.
Farm loan bonds, under the farm
Loan Act of 1916, could be bought and sold by the Reserve Banks to the
same extent as s t a t e , county, and municipal bonds could be purchased
pursuant to section lii(b) of the Federal Reserve Act; and that section prescribed a maturity lii&tatlo» of 6 months at th@ dat# of p«r~
chase. Finally, i t may be rioted that the Agricultural Credits / c t
&d$B& to section H4 of the Federal Reserve Act a new provision authoriaing th@ deserve Barjks to purchase arid s e l l in the open market acceptances
of th@ intensediate credit banks aisd the national agricultural corporatlons, mlmnwmr the Federal Reeervt Board eJsouXd declare «th«t tlie
-20*
public interest so requires,'1 All of these provisions relate to
purchases by the Reserve Banks rather than to the discounting and
lending functions of the Reserve Banks j but they have been mentioned
here in order to indicate the extent to which Congress In 1923 provided
for the use of the Federal Reserve System in facilitating the operations
of Federal intermediate credit banks and in furtherance of extensions
of agricultural credit*
Discounts for the intermediate credit banks were made subject
to regulations and limitations to be prescribed by the Federal Reserve
Board. In its 1923 revision of Regulation ktPi the Board required
each Federal Reserve Bank, in discounting paper for any intermediate
credit bank, to wgive preference to the demands of its own member banks"
and to have "due regard to the probable future needs of its own member
banks•** In addition, a Federal Reserve Bank -was prohibited from discounting such paper whenever its own reserves were less than 50 per cent
of its aggregate liabilities for deposits and Federal Reserve notes in
circulations
and the total amount discounted by all Federal Reserve
Banks at any one ti®e for any one intermediate credit bank was limited
to the amount of the capital and surplus of such intermediate credit
bank*
In 1926 , both of these amount limitations were made less
rigid by an amendment to the regulation allowing them to be exceeded
<o
wwith the permission of the Board.w<?7 In the 193? general revision of
Regulation A, the limitation on discounts by a l l Reserve Banks lor
any one intermediate credit bank was omitted altogether*
Finally, in
-21the other limitation was also omitted, primarily because the
reserves of all Federal Reserve Banks had for some time been less than
£0 per cent of their deposit and note liabilities and the Board's permission would therefore be necessary in all cases. It was specifically
provided that all discounts for intermediate credit banks should be
node only with the permission of the Board.
In the meantime, Congress had amended the law to provide the
Federal intermediate credit banks with additional facilities for
"acquiring funds through the Federal reserve system.11
The Act of
1°, 1932, •* authorised the use of intermediate credit bank debentures as collateral for advances by the Reserve Banks to member banks
and, in addition, amended section 13a of the Federal Reserve Act to
permit the discount for the intermediate credit banks of notes payable
to such banks and indorsed by them if tiiey have isaturities of not move
than 9 months and are secured by paper eligible for discount by the
Reserve Banks. The authority for advances on debentures of internediate credit banks will be discussed in a later chapter.
The purpose
of the added authority to discount notes payable to the intermediate
credit banks was slsg&y to permit the discounting of paper representing
direct advances made by such banks to agricultural associations and
other financial institutions* As explained by Chairman Steagall of
the House Banking and Currency Com&itt©e, it was "a piece of lost
machinery in the intermediate credit banks" that the Committee was
attempting to supply.
#
See Ch. VII, p
By way of susrasry, the Federal Reserve Banks are presently
authorised, with the peraission of the Board, to discount for any
Federal intermediate credit bank (1) papor Meeting the regulatory
definition of «agricultural paper* and (2) notes payable to such inter-»
mediat© credit bank which represent loans made by i t and i&ich are
secured by any paper eligible for discount by the Reserve Banks.
In
either case the paper must be indorsed by the intermediate credit bank
and have a isaturity of not more than 9 months at the time of discount*
So amount limitation is now prescribed) bat the Reserve Bank must give
due regard to the demands and probable future needs of i t s member banks*
FOOTHQTgS
1
Act of July 17, 1916 (39 St*t. 360).
2 The Reaerve Banks vere authorized to buy &nd sell such bonds to the saae
extent that they could purchase and sell nunioipfd bonds under section li(b)
of the Federal Reserve Act. See 12 U. S. Code, see. 943. Section ll(h) permitted the purchase and sale of minicipal bonds having maturities of not more thaa
6 months. Member banks were jjiven blanket authority by the F m m Loan Act to
buy and soil far* loan bonds. See 12 0. S. Code, aee. 94*.
3 See diocuasion during the Congressional debates on the Agricultural Credits
Act of 1923$ H Cong. fl©c. VftU, 1746.
A U SUt.
5 March ^, 19*3 (& §t&t. U 5 4 ) .
6, Ibid., p. 4-3» p» 55. The B&nking and Currency Committees agreed that it
vas desirable to encourage more ..-ountry banks to join the System* (See
Seaate Eeport So. 99S, p. 85 House Keport Ko. 171i, p. 19). A proposal ttf
increase -iividonds veil 00 Federal ^e3t!rre Benk stocK v»s finally bb&.adon*4
as not being & substantial iaiucement to membership, (^ee House heport
No. lTli, p* 19) Hovever, the Agricultural Credits Act sought to osfce seaborship more attractive by somewhat liberalizing capit&l requirements, and a.
Joint Congressional CoEasittee vas assigned the task of .cru»ueririg vh&t
might be taken to increase membership.
7
House Hearings on S. 4280, Jan. 31, Feb. 2-19, 1923, p. 1.
8
64 Cong. fiec. 1753.
9
House Hearings on 3. 12BQ, Jan* 31, 19*3, p. 1.
10
Ibid., p. 62.
11
19*3 BOLLETIH 913.
12
Keg. G, Series of 1915| 1915 BULLETIN 38.
13
Reg, A, Scries of 19*3, £-«c. VI(s); 19:3 BULLETIN 893-
U
iieg. A, 1955, ^ec. 3(s)j 1955 BULLETIN ia.
15 1918 BULLETIN 310.
16 1916 BULLETIH 526.
17 1918 iiULLETIH Ilia.
13 1918 BULLETIJi 310, 312.
19 1915 BULLETIN 75.
20 1918 BULLETIN 309.
(footnotes, eont*d»)
~2-
21 1916 BULLETIN 6?.
22 1918 BlTLLETBt 71*3. But the note of an irrigation company i«
commercial rather than agricultural paper, even though a l l of i t s
customers are farmers. 1921 BUO^TOf 96I|.
23 See 1916 BOIXETIK 6791 1917 BULLEISH 378*
21* i$u
mmtnn
U 2 | 191$ Bmxmii 72.
25 1915 BtJLLmH 212.
26 1917 BULLE^IK 690*
27 See statement by Sen. capper, 6)4 Cong. Hec. 1757*
28 Sen. Rep. Ho. 998, 67th Cong,, p. 7»
29 6b Cong* H«c. U9O3.
30 Eugene Meyer f e l t thet this restriction was unimportant because
of the large reserves available to the Reserve Banks* Hearings on
S, 1*280, 67th Cong,, p* 60.
31 Sen, Hep* Ho* 998, 67th Cong., p. 732 Reg. Ho. $ | 191ii Annual Report, p* 61.
33 Circular Ho. 13, 191U Annual Report, p. l62i»
3U Act of Sept. 7, 1916 (39 Stat. 752)* See etateiaent by gen. Oven,
53 Cong, lee* 11002* %
Reg. A, Series o£ 1923, see. VXGOl 2.923 BULI^flH
36 1923 BttLXETm 911. S«6 siataneiit by Mr. Platt cbrii^ hearings on
S. k2BQ$ 67th Cong., p. lOiij and also sen* Rep. no, 99§9 67th Cong*,
p . 6*
37 Act of Isy 29, 1928 (U5 Stat. 975).
38 Stat.
§ )tasr contained i n F. R. Act, see. 1 3 , par.
39 Heg. A, Series of 1923, sec. VIIl 1923 BULLETIN 89U.
kO Beg. A, 1955, sec. 3 ( b ) | 1955 BULLKtIM U .
id 1923 BULLIT1H 276.
| 12 U.s.C,
(Footnotes, cont*d.)
~3~
2*2 1925 MILLEOT 737.
U3 1926 BULLETIN 05t»
lilt Beg, A, 1937* see* l(b)| 1937 BULLETIN 981*.
U5 See Hearings o n S * U28O, 67th Cong., p. 60.
I|6 Ibid., p. 7iu
i*7 Beg. A, Series of 1923, sec. H I I ) 1923 BULLETIN 89U.
1*8 leg. A, 1955# sec. 3(g)f 1955 BULLETIN 12»
50 1923 BULLETIN 911 • For statement by Ettgene Seyer regarding
developiaent of ©ucb associations, aee Hearings on S. U28O before feus©
Banking and Currency Committee, 67th Cong., p. 61.
$1 1923 B m B f l H 999•
52 See summary of such rulings in 1922 SULLKTBI
$3 1921 BULLETIN
5U Hearings on S. U280, before Bouse Banking and Currency
67th Cong*, p. 61.
$$ 1923 KJLL^TIH 999*
$6 Beg. A, Series of 1923, sec. ?I(b)j 1923 BULLETIN 893. The
provisions remain unchanged in the present Regulation. See Reg* A,
19$$, sec. 3(f)i 1 9 # WJWmh
12.
$1 Reg. A, Series of 1923, am* ?i{d)j 1923 BUU^TIH 89i*.
§8 This limitation was not applicable, however, where paper of a Federal
iatemediate credit bank was rediscounted at a Federal Reserve Bank by
a meaber bank. 1926 BULLIOT 252.
39 1928 BDLLKTXK 777*
60
61
62
63
1937 BULLETIN
Reg. A, 19S£, sec. 6(a)j 1955 BULLETIN lit.
75 Cong. Rec. 8860.
1*7 Stat. 159.
-31VII,
ADTOJCBS TO MOBER BABK3
•
U.
• » • #
THE GMSS-STF&OALL ACTt A BHEAK WITH THE PAST
A date of the utmost importance i n the history of the
lending functions of the Federal Reserve Banks was February 27, 1932,
this date of enactment of the so~ealled Glsss-Steagall Act.^
I t was
a brief statute of only three sections, but one which raarked a definite
change in the concept of the nature of the lending authority of the
Reserve Banks.
Previously, emphasis had been placed on compliance with
more or l e s s formal and technical requirements for e l i g i b i l i t y , par*
t i c u l a r l y self-liquidation out of commercial transactionsj thereafter
emphasis was placed more and more upon the soundness of the paper
offered as a basis for credit*
The Glass-Steagall Act was e s s e n t i a l l y an emergency oeasure.
I t s purpose was, I f possible, to restore confidence i n the banking
system, halt bank f a i l u r e s , loosen c r e d i t , and bring currency out of
hoarding*
As stated by the b i l l ' s co-author, Representative s t e a g a l l ,
the banking and credit machinery of the country had ^drifted into
unhappy days, 1 ^'
/^n "omnibus" banking b i l l - the so-called Glass
b i l l - was then peuding in the Senate*
Designed to correct the abuses
which had led to the "unhappy days" - the use of bank funds for
speculative purposes and participation by banks in the securities
business, that b i l l was to be enacted more than a year l a t e r as the
Banking Act of 1933*
In the meantime, some immediate action was
-32deemed necessary to dispel the predominant atmosphere of uncertainty
and apprehension.
The extreme urgency of the situation is indicated by th*
legislative progress of the Glass-Steagall b i n . It was introduced
in both Houses on February 11) It was reported and debated in the
Senate on Friday, February 12, and on the same day hearings were held
by the House Banking and Currency Coiamitteej on Monday the l£th it
was passed by the House; after further debate in the Senate on the
18 th, it was passed by that body on the following day; and the bill
was signed by the President on the 27th. Indeed, some members of
Congress complained of the shortness of time allowed for consideration
of tt* M i l * * *
J5;:K:;;
•
• •••-^P
The bill contained three provisions. One of them amended
section 16 of the Federal Reserve Act to permit direct obligations of
the United States to be used as collateral for the issuance of Federal
Reserve notes until March 3# 1933. Previously, such notes could be
issued only against gold, gold certificates, and eligible paper rediscounted by the Reserve Banks* Because of the shrinkage in the amount
of conaaercial paper offered for discount, Federal Reserve notes then
outstanding were backed to the extent of nearly 80 per cent by gold,
although the Federal Reserve Act required, and contemplated, only a
gold reserve of kO per cent against outstanding Federal Reserve notes.k
There were those who felt that permission for the use of Government
obligations as security for Federal leserve notes would be inconsistent
with the original concept of an "elastic" currency backed by commercial
paper rather than Government bonds *
the majority, however, wewi
willing, at least as a temporary measure, to depart from the original
concept because they believed that hoarding of currency would be offset
by an "emergency circulation of Federal reserve notes secured by
Government bonds.n 51 Moreover, this amenckaent would have the effect
of "turning loose" about $800,000,000 of "free gold«,^2 and would
thereby ^fortify the gold status of th® Federal reserve banks in this
period of extraordinary disturbance•"
to
But it is with the other two provisions of the Glass-Steagall
Act that this history is more directly concerned, for they permitted
the Federal Reserve Banks for the first time, although only in emergency
situations, to extend credit to member banks on the basis of any sound
or "satisfactory" assets, whether or not technically eligible for re*
discount*
Two new sections were added to the Federal Reserve Act,
sections 10(a) and 10(b). Section 10(a) authorized any Federal Reserve
Bank, with the consent of at least five members of the Federal Reserve
Board, to make advances to groups of five or more member banks on their
promissory notes under certain conditions, one of which was that the
bank or banks in the group that received the proceeds had no adequate
amounts of "eligible* paper. Seetion 10(b) provided authority, until
March 3* 1933# under which a Reserve Bank in "exceptional and exigent
circumstances" could make an advance to an individual member bank on
-Jiti t s notes "secured to the satisfaction 11 of the Reserve Bank, i f the
member bank had no further "eligible" paper* •
The principal objective of these provisions was to reassure
banks by making i t clear that in an emergency they could use long-term
paper, such as mortgages, as a basis for borrowing from the Reserve
Banks. Actually, there was no real shortage of "eligible" paper among
the banks of the country as a whole* During the hearings on the b i l l
before the House Banking and currency committee, Governor Meyer of the
Board estimated that member banks held from $8 billion to $8-1/2 billion
of eligible paper including Government bonds.
The diffictilty,
Governor Meyer said, was that the banks were "timid11 about borrowing.
In the prevailing state of confusion and fear, banks f e l t i t necessary
»to keep on hand enough liquid securities or eligible paper to respond
to any contingency that might arise 0 in order to meet possible demands
of their depositors.^?
w
senator Glass put the situation as follows:^
* # # There i s plenty of eligible assets in the
portfolios of the member banks of the Federal reserve
system, * * *•
The meafcer banks of the system, the
banking community of the United States, have ceased to
function through abject fear and have communicated this
fear to depositors. * # *H
In other words, the purpose of tile Act was largely
psychological.
remarked I-*'
At another point during the debates, Senator Glass
*# * # The chief psychological advantage of this
measure - and it is perhaps a valuable psychological
advantage * is that it gives assurance to these frightened
and timid bankers throughout the country that if they will
only respond to the requirements of cornneret* if they will
only help in relieving themselves and the country from
this depression and in doing so exhaust their eligible
assets, then and only then may they make use of their
ineligible assets."
Similarly, Senator Fletcher felt that the bill would place banks in a
position where they could "take greater risks and make loans and accommodate their customers to a greater extent11 than they had been
doing.^8
Some feared that, by broadening the base for borrowings from
1iie Reserve Banks, the bill would be inflationary.^ The Senate
Coamittee's Report, however, stated that the bill was "not intended
nor should it be used for undue inflation of the currency. *°° Similarly,
the House Report expressed the belief that the bill, ^without undue
expansion", would result in easier credit which would aid in ending
beak failures and in improvement of business conditions generally.H
In other words, it was felt that if the bill did cause some inflation
it would not, in the circumstances, be an undue or improper inflation.
As one Congressman put it, "If by easing credit we increase confidence
and dispel fear, we shall observe a resulting flow into rediscount
channels of hoarded redis countable paper, with a resultant issuance of
-36Federal reserve notes • * * * There is nothing inflationary in such a
program, because there is no undue or unwarrantable element in that
which is normal.11
There were some, indeed, -who were afraid, not
that banks would borrow too much under the bill, but that they would
borrow too little. ^
In any event, it was emphasised that the provisions of the
Act were to be utilized only in exceptional and emergency situations.
A few, like Senator Vandenberg, suggested that commercial practices
had changed over the years, that "Federal reserve definitions should
progress with the times11, and that Bsound11 assets shouM be eligible
as a basis for Federal reserve credit even thougji they ttfell outside
the arbitrary limitations set up in the original Federal reserve act.0
But Governor Meyer of tfie Board declared that the bill was intended to
be used only in "exceptional casee 11 ,^ and that it would provide
facilities to be availed of «in an amergency.*^
The Act itself stated
in its title that it was to provide means for meeting the needs of
member banks "in exceptional circumstances"j and the new section 10(b),
authorising advances on any satisfactory assets, was limited to *exceptional and exigent circumstances" and was enacted to remain in force
only until March 3* 1933.
Hie general objectives of sections 10(a) and 10(b) weft
summarised two months after their enactment by the Senate Banking and
Currency Committee when Congress was considering a more comprehensive
banking bill. In its report on the Glass bill which later became the
Banking Act of l°33f that Committee statedt '
-37*
"Within recent months there has been a very
widespread demand for some meansof furnishing emergency
relief to banks that are in difficult straits. The
Federal reserve system was intended to furnish a means
of mutual aid and if properly administered was entirely
adequate to the necessities of the case. However, with
conditions as they stand it is likely that some plan
whereby actual assistance could be furnished to banks
which are willing to stand sponsor for one another and
thus enable them to clear up danger spots in their own
several communities would be helpful• We therefore suggested such a plan as an additional means of strengthening
and rendering useful the provisions of the Federal reserve
system*
The general plan so recommended was founded upon
the idea of joint action by clearing houses or groups of
banks in different localities designed for the purpose of
getting accommodations on their joint unsecured notes at
reserve banks up to such amount as might be held prudent;
likewise, in exigent cases, relief was provided for individual banks. Such emergency credit should be retired as soon
as possible, and therefore it seemed best to provide severe
restrictions upon its use and duration.* * #*»
Although regarded in those "unhappy days11 of 1932 as a
piec# of emergency legislation, the Glass-Steagall Act marked a turning
pointf and, as it later developed, it proved to be more than a
temporary measure* The authority for the use of Governiaent bonds as
security for Federal Reserve notes was extended from time to tine and
finally made permanent. Section 10(a), authorizing advances to groups
of member banks, is still on the statute books, although of little
practical significance* Section 10(b) # providing for advances on
satisfactory assets, is now permanent legislation and no longer restricted
to emergency situations. It is in order at this point to consider in
more detail the purposes, history, and application of these particular
sections of the Federal Reserve Act relating to advances to member banks.
CHAPTER VII - FOOTNOTES
U6 U7 Stat. 56.
U7 75 Cong, Rec. 3963.
U8 E.g., Mr. Shannon (75 Cong. Rec. 3983); Mr. McFadden (75 Cong. Rec. 3986)j
and Sen. Couzens (75 Cong. Reo. UO53).
k9 Report of House Committee on Banking and Currency (Rep. No. U75,
Feb. 13, 1932), p. 2.
50 Mr. McFadden, 75 Cong. Rec. 3986.
51 Sen. Robinson, 75 Cong. Rec. J*223. In the House, Mr. Stafford saidt
"This bill could not be justified in normal times, because some of the
security that is offered for Federal reserve notes, though perfectly sound,
is not of liquid character, such as bonds and mortgages. But hard cases
require exceptional treatment. I justify this only as a temporary expedient * • *." (75 Cong. Rec. 3981).
52 75 Cong. Rec. 3966.
53 Report of Senate Banking and Currency Comm. (Report Ho. 237, 75th Cong.*
Feb. 1 2 , 1932), p . 2*
-v^^.^-
•*¥<$• ,<*.*;>&• '
51* Hearings on H. R. 9203, Feb. 12, 1932, p. 15» Later, the Board reported
that, as of Dec. 31, 1931, member banks held $ii,69b,000,000 of Government
bonds and $2,573,000,000 of eligible commercial paper. 1932 BULLETIN U
55 Mr. Steagall, 75 Cong. Rec. 396k.
56 75 Cong. Rec. U136.
57 75 Cong. Rec. iil37. Senator Wolcott likewise thought the measure
would cause banks to stop "hoarding" e l i g i b l e paper and make more loans
75 Cong. Rec. l U
58 75 Cong. Rec.
59 Mr. LaOuardia, 75 Cong. Reo. 3970.
60 Rep. No. 237, 72d Cong., Feb. 12, 1932.
61 Rep. Ho. U75, 72d Cong., Feb. 13, 1932.
62 Mr. Beedy, 75 Cong. Rec. 3980.
63 See statement by Secretary of the Treasury Ogden Mills during Hearings
on H. R. 9203, Feb. 12, 1932, p. 23.
CHAPTER V H - FOOTNOTES (Cont»d.)
-2-
6k 75 Cong. Rec. 1*228• Similarly, Rep. Williamson felt that a liberalisation
of the eligibility rules should be made permanent legislation. 75 Cong. Rec.
3972.
65 Hearings, p. 18.
66 Ibid., p. 3.
67 Sen. Report No. $8U, on S. 11*12, 72d Cong., April 22, 1932, p. 12.
May 23, 1956
A Preliminary Memorandum on a
Proposed Study of the Evolution of
the Payments Mechanism
From: Bray Hammond
The object of this study would be an account of the payments
mechanism of the economy, including the Interdistrict Settlement
Fund of the Reserve Banks, local and regional clearing houses,
correspondent arrangements, and monetary transfers, both private
and governmental, as well as check collections.
That mechanism,
centering in the Reserve System, is an achievement of organization
characteristic of the modern economy and co-ordinate with its
productive and distributive techniques. Its evolution has followed
the railway, the telegraph, the clearing house, the airplane,
electronics, the development of large scale business organization,
and the growth of governmental functions.
It is an important raison
d etre of the Federal Reserve System, prominent i,n the early days
of the Reserve Banks but since then so efficient and noiseless that
its operation may easily be overlooked.
I should not suppose that
the more difficult and discretionary central banking functions, such
as open market operations, would ever reach such a degree of automaticity; but it is at least of historical interest that the payments
mechanism once occupied as much attention as the central banking
I.
processes now absorb, or more.
There seems to be no occasion for a detailed technical
description of the mechanism. I have in mind rather an account
concerned with its economic significance and the contrast between
it and what it followed.
Up to a century ago or so domestic move-
ments of specie were still a factor in effecting payments at a
distance, as movements of gold are in international exchange today.
The sale of domestic exchange was still a major element of bank
income and the movement of funds from region to region, whether
in specie or in bills, was still a dominant influence on the demand
for funds.
The situation in 1824 is indicated by the following state-
ment from instructions sent by Nicholas Biddle to the New Orleans
office of the Bank of the United States.
"More particularly,"
Biddle said, "it appears to us that the discounting domestic bills
at the mere interest of the money, without any charge for the
exchange, is not an adequate profit for the risk and must have so
injurious a tendency on the purchases of foreign exchange that it
would be preferable for the Bank to decline such discounts unless
at least one per cent were added to the interest."
At that time, seasonal movements of grain and meat down the
Mississippi and of cotton northward and overseas dominated business,
and inter-regional trade was spoken of and reckoned with as "export"
and "import" trade, exactly as if it were international.
Production
3.
has become more varied since then and differences between seasons
and regions have been reduced. Along with these underlying changes,
it has become the function of the Interdistrict Settlement Fund to
equalize variations in local money markets and make the economy
homogeneous in a monetary sense. Although no warrant remains for
domestic exchange charges, a large proportion of non-member banks
derive sufficient income therefrom to dominate their policy.
In describing the evolution of the payments mechanism, the
following should be taken into account:
1. The early 19th century effort to segregate federal monetary
transactions from those of private transactors in the economy — an
effort officially terminated by the establishment of the Federal
Reserve Banks as fiscal agents of the Treasury.
Z. The circuitous and inflationary routing of checks for
C
collection which the Federal Reserve Banks were intended to stop
and which were occasioned by the persistent effort of bankers to
derive income from out-of-town payments long after movements of
specie and other funds had ceased to give excuse for exchange charges,
3. The litigation and administrative difficulties encountered by
the Federal Reserve Banks in the effort to enforce the legal requirement that checks cleared through them be paid at par.
4.
4. The contemporary resistance to par clearance by banks,
outside the Federal Reserve System, which derive income from
exchange charged on checks to out-of-town payees--a resistance
which keeps many banks outside the Federal Reserve, subjects
banks within the system to unfair competition, and puts the Federal
Reserve and the Federal Deposit Insurance Corporation in a deadlock over enforcement of the prohibition against payment of interest
on demand deposits.
UNIVERSITY OF VIRGINIA
CHARLOTTESVILLE
ALDERMAN LIBRARY
DIVISION OF RARE BOOKS
AND
MANUSCRIPTS
11 June 1956
Dear Miss Adams:
Thank you so much fox your thoughtfulness in
advising me of Dx. Hammond's impending visit.
We will be pleased to have him hexe, and oux
staff will give him all possible assistance in
his xeseaxch in the Caxtex Glass papexs.
With kind xegaxds,
Sincexely youxs,
incis" L. Bexkeley,
Cuxatox of Manuscxipts
Miss Mildxed Adams
Reseaxch Dixectox
Committee on the Histoxy
of the Fedexal Resexve System
33 Libexty Stxeet
New Yoxk 45, New Yoxk
FLB/dck
Enclosuxe
UNIVERSITY OF VIRGINIA
CHARLOTTESVILUE
ALDERMAN LIBRARY
D ,V,S.ON
O^ARE
BOOKS
MANUSCRIPTS
Dear Dr. Hammonds
We will be delighted to have you and Mrs. Hammond here
during the week beginning June 18th, and to make the
Carter Glass papers available to you for research.
I am sorry to say that I shall be away froaa the
University for the two weeks beginning June 16th, and
thus will miss the pleasure of seeing you and Mrs.
Hammond. Messrs. Russell Smith and William Runge of
our Manuscripts staff, however, will be on the alert
for your arrival and will be glad to assist you, I am
also informing Mr. John Cook Wyllie, the Curator of
Rare Books, that you will be here, and I aa sure that
he will be glad for you to call on him if there is any
way in which he can be helpful.
Sincerely yours.
Francis L, Berkeley, Jr,
Curator of Manuscripts
Dr. Bray Hammond
627 G Street, S. E,
Washington 3, D. C,
FLB/dck
Copy tos v^Miss Mildred Adams
June 8, 1956
Sear Dr. Berkeley:
A distinguished former member of the research staff
of the federal Reserve Board, Dr. Bray Haamond, whose book on
pre-Civil War banks Is about to be published by the Princeton
University press, will be coming to Charlottesville the week
of June H t h to look at the Carter Glass papers. He has gone
through the inventory so that he should know what he wants
to see.
Dr. Baanaond is very auch interested in the work of
this Committee, and we are hoping that he will be able to do
a monograph or two for us. I recommend him to your hospitality
with pleasure, as X know that you will enjoy each other. We
will be most grateful for your courtesy to him.
Cordially yours,
Mildred Adams
Dr. Francis L. Berkeley
Curator of Manuscripts
Alderman Library
University of Virginia
Charlottesville, Virginia
JH¥tka
COMMITTEE ON THE HISTORY OF THE FEDERAL RESERVE SYSTEM
of CoswitUt K»«tiif
rii 16,
6
April J0 t X99t
o
u CoXklao
|f#0« Mfcrtlftt
f . l&oiXo*
Ifeo CwR^ltU* $@nfiai6 o% 10*40 *«•* lm tfeo ioungo o f tit*
I n s t i t u t i o n ai h&mlw%%on$ U. C. K<«tWr« ^i*»<tnt mr* Ch*i***M 8proul9
»
Ctikina, tt@fl#r (for M^* ^ r U i W , i i w ^ r t eftd Voodvird. Mi,** Adas*
of
i
x%
MMU Vith tts« p*«itoc of
t# he v«
tmrmtimr
mm% of t&o «i*«tlag mm d»vot«d to « Mfioo o£ r«port«
det4 U i « g v t f i o w »t#p« by ^tich :-.« ^me »s5fTl»6 t o o o n
«lo«lr»t as m$*m*m& in th* *cl&u£e of «m&a'&it2it** Cr.
1*
th« e^rJT©!H?no« h«I(S K^bruary 21ot vith Cr, lornaa Buchanan of
U o i f o i l !cto thr«# t ^ r U | « n p o r t o» ootioft talMNi « t
t##Mttg to «ph»fii*e ^aosrsphtj itnd ifi«nws« tlw « A a o i » t i m t i w
of »moklfl«fi# ft e«neid«r»ttcn of Ustlttg and * diacuseioa of
gtwfaftflito Aonoi i i t t l e surprise %% t&» yootioatot&om of «*»
w q i r w d tho ofslnloa Huit FottBd*tioa ftp^roral of th« ^ft
^o ti^mUotf olth«f % tiko offloort of tfeo Fona^aUsm @r tbo Exoemtiiro ©«Bs»i
of i t o tru»t*o» *&oa o 4ofiait« pt^posid i s sutaittod* Xt m* &£r«od xhmt
th# taattlmi s^^aXd tfiAedt t t § ptoptoctX l a vrltl&i
* « ^ X ^ X s wo
for rol*R l a th« project, bat ROE» of
I« Th« Coemltt**^ prt>po»«i of f i t o m y 4% t o t n s o f o r to th»
g InsUtutlon, and^r e#rt%la © nditions, & gr«#t«r fchars of t ^ l n l #trfiUv« rt»pon*ib4iitf two prooimtod to ^i* Bc^rd of th« Institution &t th«lr
Minutes
.. - 2 M*roh B a t i n g , fh«y ep: roved the pl*a ** offor#d» ^dth th« proviso that fir*
find an epproprl«t« person to h#ad up & • project*
3# Hit 8*«*rcii tor <*xich * p«rso% '4c «@ul4 become it full-tlin* st#«.ff
a t Brooking a, hiui ©#t tftft si»# 4iffi«mlt£*» >&ich th« Coimltt** had
previously tmeounUmd, i # * v*y of breaking t h i s lape«»#, Cr. Ctdkint swg- •
gftsted th# ohoic« of & young«r Kan ahoving proai«e of growth &ad distlnguiafcod
work* He mmd %m9 Bar* Fhtilp W. B«ll of Hfeverford «a4 J^rinctton# Dr. ^ y Perk Foveil of I^JLe, both f «sist»nt i;rof«s»or» of «oonoKics, both In th#ir
thtrti©»* Hi® Brookings pzt>poi«l i s thst they vork a i ft t#smf vlth Ih-# ;v
Bell &ipointed m &. Brookings gtaff as«aib*r vnc nominal heftd of th» project^
;,
end l^r« Fow«ll (vho vant& to kemp h i e f^l# connection) «s co-^ir©otor# to
ruch « young te«« fcuthorit«tiv« guidanc*, Pr» Calldne «iigg«3
ittb-cot^.;i tt«* of thret old#r #K|>#rtd to include &r* t e s t e r
Dr* How»nl i l i i *
I f th«e# fi^i ^loiild proT# Id %• not evftiX^bl® or
Henry W^lllch of I « l « , for«#riy on the staff of the H«v York F©dtr»l Re»©rr»
B&nk, ^na sugg#it«d t s a#eo»d chaic©» Sr# Cflkius thought i t d«sirebl# to
jowig sdioltrs as auch X*«V6f fcS^ chance for initiRtlv«
Bx'. Calkins then i rcesnted & fiirt^poiBt F«sorivndv«s on
, of vhifih S t * W a f th« G«neml Flcn for Study, contatn«d
iitnsj Plea Af a two-vol\»i« history vith rtlatod £a>nogr*i^is>
B# s group of co^rdiiw ted aoticgrRpb.sj Finn G a EyapoffluE on episodes in th*
' hietory (« copy of t b i t ?i«nioren4ui3 v i i l bn included in th« Hi nut*
Point 5 in Dr. Ceikine* mmo> the s«»lnar vhich hftd b#«m
«; t e?,rli«r atetln^a, vvuid b« mo*iifie^ to b«oo«* iisiti&Xly « series of
feroncea of jmopl© planning fto! working i n the project, Sas&ll group a*»Ungg
of t h i s kind could I » i t i d i l y be fimne*$ out of Coimitt#t? fund«# Ai thoy grov,
funds o u i d bt songlit outside*
i t ths end of t h i s pr»t«atfttlcmt »ad after l i s t i n g oth#r mxm$
outlining poi^itil« elt#rn«tiv<* ferr«n««8«nt«, ihr# Cftikins nsk©d
vievs on the mm he s'4g£#&t*d «md th« pit no proposwi. I f these
h« ^mjli tli«tt i«« Pr# Baehmietii of Hit lMk«f»XX«r Fotutdttioft*
Bell (h» h»d »««n Dr. Fovell), report b*ck to the Executiye Coea&itte#
&«k for fornftl ^ppro^ml*
the Soeaittto of th« etos proposoit r®T*«ul«l a ©autiota
to «0«ept them ((Bell «ad F o m l l as a t#as$t Walliei* for ssoond
i f *ft«r furtliiBr ts^loratloii Sr# C«lkia® roeoiiKoiitSod tlui
On pluynsj Sosssittto mntooxv ^iov*d « relucts nc?c to eodo to
sen eottploto ff«odafi to plitn tho ozojact* ©tueussioa of the pi«n# prob«9ie dlff«r«no* of optnioH| Kr« BurgeE.1? end Mr
Plan A, Mr, Bi#£ler «nd Dr. Stev^rt ui>holdine Plftn B» Mr,
mot oonvtikood th»t tfe# men pxvpoiodl oouXd hfiadl« tfao kintoijy fegr fir»t intoiit
but vilitng to f»B8\«e tlmtt xh«y oould do veluabit vork %-hich might
to th« history*
KinuUa 4A&/5&
* 3 -
t
*** *gr**d thf t Er. C*lkinfi should talk vt1h Dr. Bell. On
g
of Kr. Bungess, I t « MftflEJEfjth»t «ft«r this proiiKiiwry
tioa, ne^ottfttloiui nitt* both uttt should be otrrlad 0a for th# Oowdtttt by
Ur» Calkins aiid Mr* Sprail jol&tljr*
Tozml a c t i o n on th» Brooking* gaepoittl* v&# $oat$a&$£ u n t i l &ft#r
n e g o t i a t i o n wita M©a&rs» B « l i and P l l
tact pX&at nov in pro«p«©t musty i f «p^. ror«d by the
0SBHdtt*«f b« cleared witii 1^e Rockefeller Foundation &M ^i» ?oiaw!etionff
ft«*4mt b« «3irpr«sfi«c 1m writing befor* th» pmp®$»& »hift of
o Brooking^ could b« eompi«t«a*
.-
Dr.
are
Mr* iovfertj IU<acl«7 hm» beta moving ehe*<$ in hi« ©va tlae
of th« i«f«l hi&tory of th* t«d«i^l H«s«nr# %it«tt»
to i*&J^: this mj* d#tlr#fi no @»4«msmti®% w&att m
for Hi3a of t&e Board ^f Governors of th« F^derel He»err»
fife* ^>uid velcooe Oosaasitttt ftld In publication. He hfeS d«Telop#d
en outline, of vtiieh the Cmr.itt*e h^a a
Hr. MWK& Hfiaaeiid1 g migitstloe of & monograph to b# 4oo« oa
clearenca tii^ coil^cticn h£B b««n wid#n«d in scope
of tlit eTolirir^: role of the ptysients aeohr»n5.m» H« v,lil
&r* John ViiiifeR» h»» e3:pr«eMd him««lf *e iat*r«stoa in writing
a short book or & ioa$ monograph oa Kon#t«ry eisd Fitcs&l Policy,
vith ficcent on th« feifttr* tb« OoMcaitt«# fesked ft mor# ap«cifie
description sad co3scd1»*r.t to b« sought by Dr.
l
thro* i^t^g v^# «%^xnes#<l in p
will b« needed before c«ar.:iTm^nts ^r« r#«4f for Cosiittee
of two other mma&grftph sBggtstiong, of tin» «Bpl©ya^st of
fir* 86v»rd KHie# of a««dai*r pX«E8# of further i#iireh for «n historian
^ infib«grfOMMir.« dependent ©a th# denmlopnmt of th# B
Am Usvitatiaa k&flnsg b#«a r#«#iT#d- hf x&* &*#mtiir« Mr#etor for t
ccl^hration &t the hmm of V^oodrov Wilion 1A #te$&t«m, Virginie,, on
April 2Sta» i t ms ^r—d thfet Hr« Hugh W c h , Pr^sid«nt of th©
Btnfe of Rldyaonc!, b«s *ak«d to r*pre»«tit this Cornettt*#»
P I
vith &n
to foXlov *ftor
« Voodvard
4/16/56
PROPOSED ACTIVITIES
for the
HISTORY OF THE FEDERAL RESERVE SYSTEM
!„ Appointment of project director
Possible nominees - Mr. Calkins
Zv General Plan for Study
Plan A. A two-volume History of the Federal Reserve System
and monographs, including:
Benjamin Strong, A Biography - Lester Chandler
Legal History of the Federal Reserve System - Howard H,
Hackley
The Payments Mechanism «
=
> Bray Hammond
Recent Monetary and Fiscal Policy—An Analysis - John
Williams
Plan Bo A series of coordinated monographs, including those
, listed above and others c
Plan C. A symposium • Episodes in the History of the Federal
Reserve System*
3. Seminar
4o Encouragement of other studies
5. Depository for Papers at Columbia University
COMMITTEE ON THE HISTCRI OF THE FEDERAL RESERVE SISTEM
AGENDA
Committee Meeting
Washington, April 16, 1956
Convene at 10:30 a.m.
I. Minutes of Committee meeting held February h9 19$6S copies of which
were distributed to Committee members February 17, 19^6. (Secretary
has copy.)
II.
Resolution to amend the Minutes in accordance with the revision of
the "clause of enactment" which was proposed by Dr. Calkins after
the meeting3 circulated to members and approved by them.
III. Report on conference held February 21st with Dr. Norman Buchanan
of the Rockefeller Foundation. (Dr. Calkins).
17.
Reply of the Brookings Institution to the Proposal of this Committee
that Brookings assume further administrative responsibilities for
this project. (Dr. Calkins).
V. Report by Dr. Calkins and discussion by Committee ofs
A. Appointment of a full-time staff member to take charge
of this project.
B. Plans for continuing project:
1. Monographs to be authorized—
Hackley - Legal History
Hammond - Evolving Role of Payments Mechanism
Williams - Monetary and Eiscal Policy
2. Monographs for further consideration—
International Exchange
Financing of World War I and
U
3. Employment of Dr. Howard Ellis for a major assignment.
h. Seminar.
£. Historian.
VI.
VH.
VIII.
Committee action on the Brookings reply.
Report of this action to the Rockefeller Foundation.
Other Business.
Luncheon at 12:1|5.
COMMITTEE ON THE HISTORY OF THE FEDERAL RESERVE SYSTEM
K^rcn 15, 1956
F.
HeC. Mortis,
of
9i«,<t« for Hit
l a UMI X©«ag<f « t
Institution t t X0t3O »•«• ©»
of t&# f u l l Gecaattteti l y
COMMITTEE ON THE HISTORY OF THE FEDERAL RESERVE SYSTEM
tOl
tf*»trs« AlUn
V, Statelpli Burgess
Jto*#rt, §>• Calkltt*
ICUUM
IM* MtrtlA,
of
17lh«
Institution
41 w i l l b#
#f tht full
of
in
COMMITTEE ON THE HISTORY OF THE FEDERAL RESERVE SYSTEM
Messrs. &U&&
,
f« Randolph t««goti
Booort D, $01eiso
f » % y & JfafcOft
WUltift McC# Mt rtin, Jr.
l i l U r V. S t o w t
Ittofh g« ViUita
H
8, Woodward, Soorotttgr
In *iow of tho di»«u»*lofi Ifttt BmUntey of t&o tor** on ifttlitt tho
§QMttit%to *ad Brooking## mM^ort B»y b# iiit«r#*to£ In %r#o i«%t of
two of th«a fro» tho Hookofollor iottorsof «rant«# tht third • oo^r ©f tho
r^Ietlonskip botnoom th# $ m i t t o o
B
On January 2Xf X954# ^Hea tho pilot project nos sUrtlr^, Hist Fior*
oorotfcix of the Rock*f#U«r Fcindfetioii, ¥roto to Sr* €&Urta* «•
#
foliov#i
*I h^v* tho honor to inform you that action h&* ooo» tektn by tho
offloors of Th# i^ck»f*ll»r Foundfttion M k l ^ n-vtila^lo tho mm of ilO,OOOf or
oo auoh thoroof «# ««/ ^o ooooooo^r» to tho Brookl«g« IostltutloR for aa
stud^ of hi toriwd usttrlftle rdi^tin^ to tho ?«4ond Bosorvo
gr*nt i s for mm during tho ported otuUng April JOf 195i, *od
I t i s our und«rst*ndin^ thet i t v i l l oo &dsdnift#re<l bj tho Brooking» Instituin oolii>.borfeUon with tho Comdttoo oil the Hiatory of th« ?*<*•*•*!
of ^5ioh Mr. Ailftjs Sproul i s
•Hay vo r«qu«*t thftt wh«n GosasiunieteUE^ vith tho
oomlag HOLi grant, fom ^uoto tho roforoMO •mhn fOA as
On Hfejr 2^f 1954f Hi as Bhin<l vrott Dr. Celkins coneorning tho major
follovtl
•I hfcve th# honor to Inform you that »t & matting of the Executive
of th« Rock«feii«r Foundation on Mny 21, 195-4* motion m s t&kftti
up to #3X0,000 to The Brooklngi Institution for the preparation of *
his to 17 of tb* Fedcirftl 3le*»rw System. This grant Is In addition to the Foundation's fzumt Ho* &/, SS 3434* sad the combined swe &r» &Yaliiible for tfe#
s to inel^i« « wi<!# r»ng« of
• i b i i i t i e a . The iett«r* nftke no reference to ^ f plan or description governlug or i n s p i r i t th« grtmt. All thet the FcundfcUon fsks Is ett«stion to
eod* niBfib«>r, aa enriufei budget and && ennusl stat«ffient of
On Kfij ?1, If % the C#oimltt#«fepprov»d6 sUt*r.*?nt of the p p
#t%*#®n ^ « ConBltt«« «ad Brooking*, 4 v»©^ «frrli«r (Hsy l&$ 1954)
t h i i lifcci beenfepprovedby tHe Brooking* Board of truetec«« I t rm.&& ee
f
tmm*
It
wrnmm u s t m
^IP
on IHI aisiOBf OF IRE
mi Sftoosft&s IHSTITUTIOM
th# Coanittec on tk# History of ihm Federrl Heoerre System end the Breakings
Institution vdll £»»iaa« Joint responsibility for the tdKiaistrstion of the
project on th« History of the Ffed«r«l R«s«rr# Srstep, sitd the
of fuadf ^iRt may b# gr«nt«4 l^ th* Bock«ifalltr Foundation for
propound grant will b« sud© to th* Brookings Institution for
Jointly by th» Coiieiltttii and th« Institution.
2.
The Cos5nitt«e trill enlarge i t s pr^eent membership und ^rotid* for ^ « re-
placement of aeffibera £$ rgreed upon by the Committee and the Brooking6
Ia*titution.
3* to ffccUiti>U the it<Minigtriition of the project, the Cocudt-Ue v i l l
am Kxecutive Coodttee vith }X>v#r to E*fe# ^^inistrF.tiir© decision* jointly vith
the Brookings Institution on KtUr?, thfct isay require sction, pnd « a«nber of
this Executive Coi2imitt«e v i l l be designs ted »nd e^.povered to set for the
l a accordance with ^enersl poHel»c esUblishfrd jointly by th« Oosmlttee end
the Brookinga Institution*
4* the Co«Rltt«it directly or through i t s designated representative** nad the
irooieiagg Institution tlira^igh tae Preiii<tott ^ i l l Jointly determine the
restores and releted »etiviti»g to be ia*dertaketif the nOloetitioa of funds, the
m®im#r in uaicfo thtm
ftttivitles
jsh«Xl be i:4irsuedf the persona*! to
the ooatrftotSf grants, or otfetr ©o®rltn@at© thitt may b# mss«!»#
5.
The cdiatnistrfetiv^ zrtvn&mmts
und th© p*yta#nt of funds will bt
by the Institution on th# aatiiorlx«Uon of the President in ftcoor^&n
approved b/ the Coi»itt#« aod the Institution.
Sopiayses eagtg«d for work oa the project ^huXX b* ^pj^intad by the
of tli* Institution in consult&Uon vi*Ui a denigiifttod r«pr»a*rit®tiTe of
ossaiUe*, «a4 th^y ^tiOl ^# Joint esployete of th« C^®itt«« and t^»
Ingtitatioii for ip«$lfi«d period*, m& not wf.ul^r «^ploy#ffs of th<* Brr»o>clngi
%; COG tracts or g3nuit» for mritia^f rtttardh^ or otlstr s t r v i ^ &h»ll b#
i?nogid Igr th« President of th# Institution ia eoneuitntloa ^dth «
of the Cos^itt«##
These eoatreetg or gyeot»f «g the eirei«»
rs-tuir«# nh&ll Sytcify the obligations of the perties^ the aeount
of pey&eat» the respoaeibiXity for stiptrvisioa, sad the r#spon#ib i l l ties respeeting reading and criticl^i of eaiauioripty editorial vo&$
for publio&tion, &nd pufelioetioa f,rrengeEi*nte.
Such contreota or grunts
be entered into with the Brooking» Institution itaelf for portions of the
on %#m& that c«E;»iy with the Institution^ usuel operating practice*.
d« fbe Institution %dll k#ep & record of ita overhead ^nd other
incurred la sdkLalsteriiig the projeet# ead r«ni#r &a aeeotsstiisg to the
exp^uditurta qp to $3»^00 |>er year (a* provided ia the request)
be ehexfed ggftiast ^i# ftmds for the project.
Aiiy expenditures b«groad
9r ye«r sh&il be subject to relab«irs«iieiit ^dth ^>e approval of the
Ccwidtte**
• 4-
for th«
V
flv* yours*
vdth
third
oo
i t Is tklu third
These tar*« it«ui h*ve nov been
%t Minute Book* ttiair
for
of th#
end t;
1955 in
j tht
ng on Seturday,
from thf» files and pie zed in
s©nt you vsith
Kilured
@FedFRASER