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1057 COPY X-3513 A FEDERAL RESERvE BANK OF BOSTON 30 Pearl St. , Aug11st 10, 1922. Federal Reserve Board, Washington, D. C• Gentlemen-: I beg to acknowledge recaipt of. the Federal Reserve :Board's lettar (X-3491.1.) dated August 2, 1922, on the subject of "Special Rates on Commodity Paper". Althangh I have discussed ~his matter with our officers, I have delB¥ed replying to the letter until I could discuss it with OUI' Executive Comittee and with our Board of Directors, v.bo have met tod.ay. Our Executive Commdttee today passed the following vote: 11 'l'ha.t in the opinion of this Committee there is no demand in this district for a special rate on commodity paper" • .Although onr member banks were duly notified of the appointment of these rates on commodity paper, we had no notes· presented to this bank: during the time that the rates were in effect which complied with the ' terms of commodity paper and would. carry preferential rate and we have · never had ~ inquiry since as far as we can remember for such a demand. We have • therefore, come to the conclusion that there is no demand for ~ such rate or any silch kind of a. note in this district. As a matter of fact' from the defin1 tion of conmodi ty paper all of the transactions . \\hich would· require comrr.odi ty paper can easily be carried out just as well under a bill of exchange, and anybody wishing to obtain the lowest rates for that kind of a loan would naturally pu.t it under a bill of · exchange which we would buy at 3 1/S% discount to 3 31'?1'/o discount for all matur1 ties up to 90 days, and at 45b for ma.turi ties between 91 and 180 d~ys. ~e question of a. special commodity rate in this district, therefore, has nothing but an academic interest to Us. Very truly yours, (Signed) Frederic H. Curtiss Federal Reserve Agent. FHc/D COPY X-3513 B FEDERAL RESERVE BANK OF NEW YORK. August 10, 1922. Dear Governor Platt: I have raceived the Board's letter of A~t 2, X-3494, enclosing tentative draft of letter which it is proposed to send to all Federal Reserve Banks in case the Federal Reserve Board should decide to autho~ize special rates on commodity paper. · It appears from examination of the proposed definition that commodity paper to be entitled to a special rate would have two main characteristics: first, it would necessarily be accompanied and secured by shipping documents, warehouse, terminal or other similar receipts covering readily marketable non-perishable staples; and second, it would have to be paper on which the rate of interest of discount charged the borrower by the member bank does not exceed 6% per annum • .The question for consideration now is whether there is any need or justification for the establishment of a preferential rate on eligible notes, drafts, bills of exchan~, or trade acceptances which possess these two characteristics. · CLASS OF SECURITY NOT RECOGNIZED IN THE LAW. While the proposed regulation would not deviate from the principles set forth in the law as to the requirements of eligibility, and while the notes, drafts, bills or acceptances. as the case may be, would of themselves have to be eligible in accordance with those principles even under the proposed regu.lation, nevertheless to give a preferential rate for eligible paper merely because it is secured by a certain kind of collate•f1 superimposes upon the law a principle which never could have been contemJ?la.ted and Which, indeed, is contrary to the spirit of the Act itself, for it recognizes in a material way, and prefers in a material way, ~ certain class of securitz Which in fact h~s no substantial relation either to the eligibility of the paper or to its desirability as an investment. NOT FEASIBLE TO VARY DISCOUNT RATES IN PROPORTION TO CREDIT RISK INVOLVED. Of course the credit risk to a Reserve :Sank is fixed in part by the character of the paper discounted, and in part by the · collateral, if any, by which it is secured. :Bu:~ those factors might well be left out of consideration in the determination of the rediscount rate, as distinguished f~om an open market rate, since in all cases of rediscount the accommodation is secured by the indorsement of the borrowing member bank, and it would be futile, if not impossible, to attempt to vary the discount rate in accordance with the risk invol~ed, aside from the indorsement of the borrowing bank. If·once we admit .. ...... F.R.Bank of New York. :a -2- ,' ·... ..... ' .. ~-.... .... ,..,. X-3513 the principle that the rediscount rate should be lower merely because the credit of the maker is better or the security of the collateral is stronger_than the credit or security involved in other discounts, we would be confronted with a refinement of r~tes that would be impossible of administration. PBEFEBENTIAL RATES ON ACCEPTANCES ABOLISHED. There is far more reason that a preferential rate should be given to bankers acceptances, or even to trade acceptances, than there is to paper secured by warehouse receipts if the only question involved is one of goodness of the paper. In the early days of the System it was thought wise to encourage and develop the use of bankers acceptances , an entirely new kind of credit instrument in this country, by a preferential rate, but as soon as an opportunity offered itself in a broad open market for th~1.t kind of paper the preferential rate was abandoned and one rate was established for "money", regardless of the character of the obligation upen which it wa& procured. Only a few months ago the Federal Advisory Council and the Conference of Governors unanimously opposed the reestablishment of a preferential rate for trade acceptances when that question wa.s presented. for consideration. The same reasons prompting that opposition a.re applicable to the present case. A return to the preferential or differential rate vuo'Uld, in our opinion, be a most unfortunate step backwards. MO!IVE OF A PREFERENTIAL RATE .AND ITS EFFECT. The only apparent reason for the establishment of a preferential rate on socalled commodity paper at this time would be a desire to induce member banks to borrow on this kind of paper and thus indirectly to force more money into credits of this kind. Bu.t even if it be that that purpose would be accomplished, it would be unwise as a. matter of principle, Since it would only tend to create an artificial demand for one particular kind of credit arbitrarily ~elected by the Federal Reserve Board. It :might well lead to pleas for other special rates on elilible paper When secured in other particular ways. CHARACTER OF PAPER ITSELF HAS NO DIRECT RELATION TO PURPOSE OF REDISCOUNT, - THAT IS, TO BUILD UP RESERVES. There is another practical reason that makes the proposed action unwise. When a member bank borrows from a Federal Reserve Bank it is for the pllrpose of restoring its general credit reservoir. It is because the aggregate of its d~'s operations has impaired its reserve balance and because the law requires that that balance be made good before. further loans lila¥ be made. The money or credit obtained by the mem t:er bank from the Federal Reserve Bank b~ virtue of the discount of its paper does not of itself go ~directly to the original maker of the note discounted, but rather goes into the credit pool of the member bank for dissipation in the usual course of another day's business. The accommodation to the member ' .. ,•·. F. R. Bank of New York ' - 3- .... 1060 X-3513 :B ~ is, therefore, always for one purpose, - the restoring of its reserve balance which has become irqpaired because of _the net result ·of all of 1 ts transactions during the day. That being the purpose; the rate charged the member bank should not be varied merely because the vehicle by whiCh it obtains its funds differs slightly in the form of its security from any other paper qy which it may accomplish the same purpose, - that is the restoring of its reserVe balance. COWJI!ODITI PA.fEI! SERVES NO MOBE DESIRAJY PURPOSE THAN OTHER ELIGIBLE P.AJ?D. Fr()lll a credit standpoint conmodi ty paper woUld certainly be no better than other eligible paper secured by such collateral a.s Government bonds, for instance. and from the point of view of commerce, industry and agriculture the so-co.lled commodity paper would ho.Ye performed no greater service than the unsecured note of the farmer in the planting season or any other kind of paper the proceeds of whiCh were used for a comnercial, industrial or agricultural purpose. In fact, if there is ~ difference at all, it would be against the commodity paper, which, because of its very nature, might induce withholding goods from consumption rather tbzn moving them in the process of distribution. It would be one step toward, and an encouragement of, the socalled "Edison plan"- chef!:p money for loans secured by agricultural col'IIIlOdities, instead of l!:!!. money a.s is contemplated by that plan. T.he difference is only one of degree. NOT FEASIBLE TO YJ.RY DISCOUNT RATES ON SOLE :BASIS OF RATE CHARGED ON A PAR'l'ICUMR·PIECE OF PAm BY mE MEMBp BANK• So far _as tne second factor in the proposed commodity paper rate is concerned, there is, of course* no more rep,son to prefer cotmlOdity paper merely because the member bo.nk has not Charged the original borrower in excess of 6%, than there 1s to prefer ~ othar class of paper upon which the borrower may have obtained funds from the member bank at that rate or less. It is, of course, obvious that, as a matter of principle, independently of the questions of law involved, it would be i11possible to establish discount rates in this co~try by ~ such direct relation to rates of interest ~barged by /banks upon customers• paper~ To do so on one particular kind of customerst paper would seem to be even less justified as a. matter of principle. While Federal Reserve Bank rates might properly be related in a general wa¥ to market rates for money in the district in whiCh the batik is located, it is a decidedly different matter to charge a. member bank a. special rate on a particular note of a. customer of the member bank merely on the basis of ·~e amount of interest paid by that customr on that particular note. To follow su_ch a principle. logically, and to apply it in all cases, a.s would be the logical sequence, would result in a. confused rate policy that would laCk all of .the necessary elements of control.and purpose. SER10US LEGAL CONSIDERATIONS INVOLVED. In conclusion. while it is presumed that tha Board will give due consideration to. its legal •,,!: ... .... ~-. ;. 1061 F. R. Bank of New York B - 4- X-3513 right under the terms of Section 13 to make a "class" of paper with a special ·rate out of paper which differs from other eligible paper not in the use of its proceeds but solely in the degree of its securit~, it bas always been our understanding that except in the case of Government obligations, specially dealt with in the law, the character of the collateral to eligible paper could not be considered alone as a ground for defining a "c:;lass" of paper. Otherwise it would be perfectly proper legally for the Board to define ~ eligible paper secured by railraod bands as one class of paper, entitled to one rate, and other eligible paper, the proceeds Of Which had been used for precisely the same purpose, secured in another way, as a different class, entitled to another rate. fo do this would, in our opinion, ignore every fundamental principle of the Federal Reserve Act, which, except in the case of obligations secured by Governmant securities, looks not to the collateral to discounts bu.t to the purpose to which the proceeds have been applied by the original borrower. On questions of principle, questions of polior and questions of practical operation, we are unanimOU.sly opposed to the establishment of a preferential rate to the member b~ solely upon the ground of the particular kind of collateral by which the paper discounted i's secured, or upon the basis of the rate charged a particular borrower on that particular paper. This letter and. its conclusions has the Unanimous approval of our executive comni ttee, for whose opinions the Boa.i"d-~asked in its letter of August 2. · Very truly yours, . ,, (Signed) Benj. Strong, Governor. Honorable Edmund Platt, Vice Governor, Federal Reserve Board, Washington, D. c. ..· c X•3513 COPY FEDERAL RESERVE :BANK OF PHILADELPHIA August 9th, 1922. My dear Governor Harding: Your letter of the 2nd instant, in reference to the advisability of re-establishing special rates on commodity paper, was ~resented at a meting of oUr- Executive Committee this morning,; and the subject was fully discussed. The officers and Commi ttee are unanitnously of opinion that there are no interests in this District Which would be served by the establishment of suCh a ro.te; and that the only possible effect of its establishment would be an effort to convert other paper into what might be represented as "oonmodity paper". We can imagine that in some other Districts sane useful purpose mi"ght be served by the establishment of this specbl. rate, but. if it were to be authorized by the :Board i t would not be established by this :Bank, nor would it be generally availed of even if it were esto.blished. I am, Very truly yours, (Signed) Geo. w. Governor. Hon. w. P. G. Harding, Governor, Reserve :Soard, Washington, D. C· Feder~l Norris, 1062 ..' 1063 D X-3513 OOPY FEDERAL RESERVE BANK OF CLEVELAND Bon·. Edmmd Platt, Vice Governor, Federal Reserve Board, Washington, D. e. Dea.r Sir: With further reference to the Board's letter X-3494, da.tad August 2, 1922, subjec~- Special Rates on Comnodity Paper, I wish to actvise that the Board's letter, together with the reply of this bank datad August 4, 1922, was read to our Board of Director~ yeste~, a.nd. by a unanimous vote they approved the reply, stating the present position of the Board. with respect to fixing 1 ts comnodity rate, and wished me to advise you t\,l.~ther that they are opposed to legi t:lmatizing a spread of 2-l/2~ be.tween the rea.iscount rate of the Federal Reserve Bank and the ·rate cbo.rged by member banks to their customers. Very truly yo~s , (Signed) D. C. Wills, Chairman of the Board.. X-3513 D· 1064 COPY August 4, 1922. Bon. w. P .. G•. lia.rd.ing, GOvernor, Fede~al Reserve Board, Washington, D. c. Dear Sir: YOlli' letter X-3~4, dated August 2, 1922, in respect to the subject of special rates on ccmnodity paper, has been received. The Federal Raserve :Board is aware that this bank has never est~blished a preferential rate on commodity paper, nor'has it asked permission from the Federol Reserve :Board to do so.· Our :Board discussed the matter thorou.gbl.y when these rates were being est~blished by a few of the other Federal Reserve Banks, and we:re '\Ulanimous in ~ir opinion against their establisb.Jmntt lst: because the volume of that kind of paper in this district is inconsequential , and 2nd: because 1 t W:l.S regarded as unsound to quote a rate that might be regarded as subsidizing a. singl.e industry. Our directors also regarded it as unwise to set a precedent tbat might be construed as dictating to bllllks what rates they should charge their borrowers. Your letter. Will be brought to the attention of our Board of Directors at its next meeting. Very truly yours, (Signed) D. C. Wills ~ Chairman of the :Board· .· 1065 X-3513 E COPY FEDERAL RESERVE BANK OF RICBMOND. August 9, 1922. SUBJECT: Specia,l Rates on Conmodity Pa.Jaer. Edmund Platt , Esq. , Vice Governor 1 Federal Reserve :Board, Washington, D. C. Dear Sir: Governor Harding's lattar of .August 2nd, X-3494, on the above subject, with confidantinl tentative draft of letter whic~: the Board is considering sending out on this subject, was presented to our Board of Director~ at their meeting tod~, together with capy of my reply of August 3rd. After discussion and consideration of the matter, our Board passed the following rasolution: "RESOLVED, !~hat we a.rd opposed to a:n:y special conmodity rate." I am fozwarding this for the information of tlle Board. Very truly yours, (Signed) Caldwell Hardy Chairman of the :Board. ::_, .......· .· E X-3513 COPY FEDERAL :RESERVE BANK OF 'RICHMOND. August 3, 1922. SUBJECT: §pecial Rates on Commodity Paper Bon. w. P. G. Harding, Governor, Federal Reserve Board, Washington, D. c. ~ dear Governor: Your favor of the 2nd, X-3494, to hand on the above subject. The question was discussed confidentially at our officers conference this morning, Governor Seay being absent on his usual annual holiday. When we had a special commodity rate before we found that South Carolina members preferred to pay our full commercial rate, because they made ~re money by doing this and charging their borroNers B%· At the same time, our North carolina members availed of our special rate more often. There were very few comrrDdity loans from the balance of the district. We are inclined to think that the granting of a special rate, on condition that our member is to charge not more than a given rate, is somewhat questionable in principle, although we realize that such a policy is doubtless necessary in order to protect the original borrower. We f&al sure that little, if any, of the benefit. of any special rate we might make is passed to the original borrower. Conditions are quiet in our district, irritating discussions are much less frequent, and we feel that any new changes, the results of which would be at best of minimum advantage ~o original borrowers, would not be desirable. We think a special corrJittodity rate would naturally encourage speculative holding and unneces~arily delay orderly marketing. We have had some friction in handling regular loans against cotton three or four years old, which ought to have been sold long ago, and if a new commodity rate is to be established we think we should have a certificate that the commodity 'Oroduced is not more than 12 months old. On the ·JVbole we are not impressedwith the desirability of a special commodity rate at the present time. Yours very truly, (Signed) Caldwell Hardy 'I Chairtnar• of the Board. .· . 1.067 FE D E R A.-L l3 A. N X RE SE R VE L X-3513· ~ COPY F August 14, 1922• SUBJECT: Commodity rate; letter X-3494. Dear M':r. Platt: I am in receipt of your letter of August 11th on the above subject, answering Ttl¥ letter of the 7th· In reply beg to sar that I submdtted to our Board of Directors on Frida¥, A.ugus t 11th, capy of th~ Board's letter X-3494, and xqy reply of the 7tb· Also Governor Wellborn, 1n making his report to our Board concurred in Ttl¥ views, as expressed in his report and my letter of the 7th• Our Directors thereuppn voted that they were in thorough accord with the views expressed bt the Chairman · and the Governor, 1. a·. , they did mt believe tba.t a conmodity rate would be of full value to the producers of comnodities for the reasons stated in said comnunications·. Very truly yours, (Signed) JOS. A. MCCORD. Chainmn· Hon. Edmund Platt, Vice Governor, Federal Reserve Board, Washington, D. C. • X-3513 FEDERAL RESERVE COPY 11 SUBJECT: BANK ATLANTA August 7, 1922.. Special Rates on Comn:odi ty Paper·. Dear Governor Harding: Your letter X-3491+, August 2, 1922. In reply beg to Sa¥ that I am doubtfUl as to ~ether the co~dity rate would be of any special benefit to the producers of commodities that coild be stored in warehouses in this district. You no doubt know that the farmers in the interior deal with the smaller banks. We haven1t the large plantations or ranges in this district that they have in some of the western states·. The large plantation idea has been gradually eliminated in this district·. The landlords owning vast tracts of land have tenants on ·their property, and these tenants largely deal with the smaller banks in the interior towns, and the smaller banks have a. flat rate of s5b, per aml1l1ll, and in some instances charge more than that. When we had our commodity rates in 1915 only a. few banks availed themselves of the rate. They preferred to charge s% and pay us our regular corml1arcial and a.gricul tural discount rate, rather than ··to take the lower rate of 3% When they would be COJll)elled to loan to their customers at per annum. Some few banks in the district availed themsel'lles of the privilege at that time. Others endeavored to handle it purely for land owners, me lived in the smaller towns and who hoped to speculate in cotton, as that is the principal product; but When we advised them tnat cotton could not be held for speculative purposes under the commodity rate, they would then relieve it from that rate and put it on another basis·. If we could get all the banks to make a preferential rate to the planter, I would be heartUy in favor of the eomnodi ty rate, but the larger city banks Charge practically only 6 or 7~ interest, and cotton that is shipped in from country towns to large cities like Atlanta, Savanruah, Montgomery, Mobile, New Orleans, and Jackson, Miss., the loans are usually made by the larger city banks at a 6% rate where the cotton is pled3ed as co~lateral thereto. The subject of the comnodity rate is of so vital importance that I shall read your letter to our :Soard. of Directors on Friday next, and ask their opinion 'Whether a commodity rate would be appreciated and used, and whether our member banks would take advantage of the law rate provided they would have to loan to their customers at not over 6% including all comnissions. I shall endeavor to obtain a coneensus of opinion from our Directors on Friday and will then write you relative thereto. 6% Very truly yours, (Signed) Hon. w. P. G. Barding, Governor, Federal Reserve :Board, Washington, D. C. JOS. A. MCCORD. Chairman. •• f X-3513 FEDERAL ~~~ERVE BANK ATL.ANr.A. August 5, 1922·. COPY F w. P .. G. Harding, Governor, Federal Reserve Board, Washington, D. c.. Mr. Dear SiJ!'; Replying to your circular letter X-3494 of August 2, 1922, I wish to advise that our Executive Committee has considered the matter of establishing a special rate of 3t% on commodity paper, on which the rate of interest or disco-unt including commission- charged the borrower does not exceed 6% per a.nnurri. Our Committee is not inclined to favor this special rate, as, in our earnest opinion, member ba.Dks generally would not be disposed to avail themselves of it. OUr reasons for reaChing this conclusion are: In the larger cities of our District, the prevailing rate is now 6%. T.he banks in the smaller communities have an established rate of S% which, it is believed, they would not care to abrogate. For them to give a preferential rate on co~ modities would ass~~edly create confusion among their customers. In the smaller batiks, it is really necessary to charge 8~ in order to make a reasonable profit; and we believe that they would prefer a continuance of the present rate of 4~% on our part, thus permitting them to maintain their charge of S7L This would yield them a greater profit on their borrowin~ than they would receive if they discounted paper with us at 3t%, but were themselves restricted to a charge of 6%. This being the attitude of the member banks, the borrowers would derive very little benefit from our establishing the preferential rate. Vary truly yours, (Signed) M. B.. WELLBOBN Governor·.. ' • ( ..., .· FEDERAL RESERVE X-3513 BANK CHICAGO c 0p y G August 5, 1922. Sub.iect: Special Rates on Commoditi Paper. Dear Governor Harding! Answering your letter of August second (~3494) I will state that I laid your letter before our Executive Commdttee at its regular session yesterday. I regret that only a bare quorwn of the corrmi ttee were presant and that so many of the members of our board are, at the moment, beyond reach. One is in Europe; another is up in the wilds of Canada; and so on. The Federal Reserve Bank of Chicago never established a special rate on commodity paper, if my remembrance is correct. When a number of the other Federal Reserve Banks established such special rates a numbBr of years agQ the sentiment of our board was always against it. At that time, if I remember rightly, none of the members of our board favored it. While the corrplexion of our board has changed somewhat since that time a n:ajority of the old members are still serving, and I have no reasons to believe that any of them have changed their minds in regard to this matter. !lhe sentiment of our Executive Committee yesterday was, that on the basis of information thus far before us, t:Oe Chicago bank would not care to establish such special rates on comnodity paper, and that probably no considerable number of our member banks would avail themselves of it. Very truly yours, (Signed) W• .A. HEATH Chairman. Mr. W. P. G. Harding, Governor, Federal Reserve Board, Washington, D. c. H COPY X-3513. FEDERAL RESERVE BANK OF ST. LOUIS. August 7, 1922. Dear Governor: In the absence of Mr. lVIartin I am replying to your letter X-3494, bearing date of the 2nd, after having discussed the subject thereof with other officers of this bank, but cannot at this time convey the opinion of our Executive Committee relative thereto because, due to vacations, the Committee is not meeting regularly. The establishment of a S?ecial rate on commodity paper would be of benefit to a certain class of borrowers, provided the member batiks reduced their interest rate to such borrowers to 6%. In this district, with the exception of one state and the larger centers in the others, the austomary interest rate is above 6%. For this reason it is unlikely that, if a special rate on comrr.odity paper is established, aey benefit w·ill accrue therefrom to the borrovvers, although member banks would no doubt take advantage thereof on any paper held by them or acquired on which the rate charged was 6% or less. In other words, it is not likely that the establishnsnt of such a rate would result in any chan@6 in the rates of the member banks to their customers, although the member banks would benefit whenever they happened to hold and rediscount any paper which would come within the definition of commodity paper and on Which the rate of interest charged was within the 1 imit • In the rural communities of this district, with the exception of the cotton and tobacco sections, little paper is found that would come within the Board's definition of commodity paper. It therefore follows that the rate would be of advantage primarily to the member ban}:s financing the grower or buyer of cotton and tobacco and the middle man handling other commodities in this district. Generally speaking, we are not in favor of special rates on certain classes of paper. As we see it, the principal, if not the sole advantage in the establishment of suCh a rate would be its possible psychological effect in that it would indicate that the commodities of the farmer coulQ be marketed with Cheap money whereas in practical operation such would probably H F. R. Bank of St. Louis - 2- X-3513 not be the case • Since in our juci.gment the establishment of such a rate would,general.ly speaking, benefit only certain member banks and then only in a limited way, it is doubtful whether our Board would feel disposed to establish a special rate on the class of paper in question should the Federal Reserve Board permit same. Yours very truly, (Signed) D. C. Biggs. Governor. Honorable w. P. G. Harding, Governor, Federal Reserve Board, Washington, D. c. .· I COPY X-3513 :F1£DERAL RESERVE BANK OF MUT.NEAPOLIS August 17, 1922. Mr. Edmund Platt, Vice Governor, Federal Reserve Board, Tiashington, D. c. Dear Governor Platt: The Boardls letter of J.ugu.st 2, (X-3494) was received when I was in Northern Michigan. Commodity rates and others were discussed by cmr Directors at their meeting Monday, and I enclose herewith exce~ts from our minute book which will be self-explanatory of the views of our Directors, You will note in the e:::cerpts of the minutes that our Directors believe that if a 4~ rate was established on commodity paper, a similar rate should be established on notes secured by U. S. Government bonds. The Board also makes inquiry whether, in our opinion, our member banks generally will be inclined to avail themselves of the commodity rate. It is our opinion that the banks in the larger centers will no doubt take advantage of it, but we doubt very much whether the banks in the smaller communities will attempt to use it. Banks in the smaller centers generally secure much better than a six per cent rate from their customers, and we do not believe that such small banks would make a 6% rate to their customers on commodity paper even though the same could be rediscounted with us one half or one per cent less. Yours very truly, (Signed) R. A. Young Governor. .· I COPY - 2- X-3513 Federal Reserve Bank of Minneapoli~. Copy of excerpts from minute book. Chairman Rich brought up for discussion the existing discount rates of this bank, which were thoroughly considered. He stated that while the Federal Reserve Board has offered no suggestion, some of its members have the i~ression that the spread between the rates of this bank and those of the other Federal Reserve Banks is greater than it should be, Minneapolis and Kansas City being the only institutions' still maintaining the 5 per cent rediscount rate. The subject was thoroughly discussed and the Chairman asked for the individual opinions of the members of the Board, following which Director Bigelow, .supported by Director Bassett, moved that the rediscount rate of this bank on all paper and all maturities with the exception of bankers acceptances, should l:e reduced to 4~ per cent, subject to the approval of · the Federal Reserve Board. The resolution was adopted, Director Hixon voting no. Governor Xoung then presented the Board's general letter X-3494 of the 2nd inst., upon the revival of ·special rates on commodity paper. After thorough discussion, Director Hixon, supported by Director Bigelow, moved that the Executive Committee be authorized to establish a commodity rate at not less than 4 per cent, if the action of other Federal Reserv~ Banks and conditions in this district should, in their judgment, warrant such action. After a discussion as to the advisability of establishing special rates on notes secured by Government bonds, Director Bassett. supported by Director McDowell, moved that the Execntive Committee be authorized to establish a special rate on PaPer secured by Government securities, the rate to be the same rate agra~d on for commodity paper should a commodity rate be established, and l ! sucn special rates are established by other reserve banks on the same class of paper. ,· I X-3513 COPY Telegram from Federal Reserve Bank of Minneapolis .August 17, 1922 Hoxton, Washington Letter X-3494 discussed at our Directors• meeting Monday. Our Directors approve of establishment of commodity rate and have authorized executive committee to establish such rate at not less than four per cent i f action of other Federal Reserve Banks and conditions in this district should in their judgment warrant such acti.on. Letter follows giving details. (Signed) Young. .· J CO?Y X-3513 FEDERAL RESERVE BANK OF KANSAS CITY. .August 10, 1922. Federal Reserve Washington, D. C. Gentlemen: ****~*******************************~********* Rego.~'t..4.Lng tha Board's letter (X-3494) on special rates for commodity paper, our board requests me to say that it hasitates to request a speci~l rate on this class of paper an~ is of the opinion that member bar¥rn generally would not be inclined to avail themselves of it. At this time there is ample credit available for the purpose of carryi~g the commodities of this District, pending the orderly marketing th:;reof and at rate~ that are entiraly satisfactory. ***********************************************~ Yours \•ery truly, (Signed)'.A.sa E. Ramsay Chairrr.a.n of the Board. .• F E D E R A L R E S E R V E DALLAS c 0p y BANK X-3513 August 7, 1922. K Mr. W. P. G. Barding, Governor, Federa 1 Reserve Board, Washington, D. C. Dear Governor Barding: Referring to your X-3494, on the subject, "Special Rates on Commodity Paper, 11 I am writing to sa:y that in advance of our meeting thls morning I sounded out some of our leading bankers on the subject of the effect of putting in these comnodity rates, to what extent, in their opinion, they would be availed of, and what effect the adoption of such rates would have on the general financial situation. With only one exception the b~kers were inclined to think that the effect of the adoption of the 3~% co:nmodi ty rate would be good. One of the bankers, Mr. Pondrom, thought a better plan would be to reduce our discount rates to 4% on all classes of paper. I found pretty ret;l.dy interest, among all the bankers present at the meeting, in this view, and some of our ownn directors were inc lined to the same view. However, Governor McKinney and nwself both took a pretty firm position that the financial conditions and the current interest rates in this district would not justify cmy further reduction of our discount rate, n.nd further we felt sure the Board would not approve the reduction , calling their attention to your telegram inquiring whether our Board had consHered the effect when fixing rate of ~%, and the small earning percentage on our assets. The matter was discussed at length by our Board and they unanimously agreed and asked that the ~% r:1te be :ulopt-"':>-li 1 subject, of course, to all of the provisions contained in your confide:3tial, tentative draft~ It was thought that the psychologic:1l effect of this rate would be good, that it would be an assurance of the willingness and ability of the Federal Reserve Banks to do their part in marketing the present crop at a preferential rate, and that the announcement of this rate would tend to stablize conditions and help put.generally. It was further believed that if a rata of this kind were put ' in over the south generally it would have a good effect abroad, and among domestic consumers of cotton, as notice of the willingness and ability of the System to function and do its part in the ~arketing of the crop. As you will doubtless recall, when this rate was enforced in 1915 and 1916, it was not availed of much in this section, however, interest rates have decreased somewhat in this state since then, and a great many, perhaps hundreds of wa~ehouses, scattered over the District have been built, making it easier to meet the conditions in respect to this sort of paper. I am inclined to believe that the banks will be ~re inclined to avail themselves of this facility than heretofore, and on the whole the adoption of this·rate will have a good effect. . •' .( c 0 p y K X-3513 - 2- If the rate is adopted at all it should be done so speedily. Cotton is moving to some extent in the extreme southern and southwest Texas, and in a few weeks will be moving in substantial volume in central Texas. I notice that cities less than fift7 miles south of us have been receiving their first bale. If and when the Board has fully determined the course of the matter I shall be glad to receive advice by wire so announcement can be made. Very truly yours, (Signed) U. F. RAMSEY Chairman. X-3513 TELEGRAM from FEDERAL RESERVE BANK DALLAS c 0 py K .August 7, 1922. Harding, Washington. Our board of directors tod~ after fully canvassing the matter are inclined to believe the special commodity rate suggested, your X-3494~ WQuld have good effect in many ways and would probably be pretty well availed of not only by the smaller banks of the District but the large ones and that it would tend to somewhat increase efficie~y in our marketing system and they instruct me to advise the Board tl'li:i.t they had at this meeting requested the Federal Reserve Board to approve the establishment of a special rate of }~%_.on COID!llOdi ty paper on which the interest of the discounting bank would not exceed 6%. If this can be done at all it would seem to me that it would be wise to take this step imnediately and I would be glad to be advised of the approval of this rate fixed by our board of directors at the earliest practicable moment. X-3513 FEDERAL RESERVE BANK S.AN FRANCISCO C0P Y August 21, 1922 .. L SUBJECT: NW Special Rate on ·commodity Paper. dear Governor: Receipt is acknowledged of your letter of 14th instant. The Board 1 s suggestion regarding a special rate on commodi~ paper was presented to our directors at their meeting after discussion in the. Executive Comni ttee. .After going over the matter the Board voted that it approve the view expressed to yea in ~ letter o£ 8th inst~t. Yours very truly, (signed) Jobn Perrin. Chairman of the Board. The Honorable Edmund Platt, Viae Gover nor, Federal Reserve Board, Washington, D. c. X-3513 FEDERAL RESERVE :BANK S.AN FRllNCISCO COPY L SUBJECT: August 8, 1922. Special Rates on Comnodity Paper. lq dear Governor: Receipt is acknowledged of your letter of August 2nd, a confidential tentative draft, discussed somewhat at our Executive Committee meeting this morning, and I have had a further discussion with Governor Calkins. It seems to be the consensus of our opinions that this bank would n~t be disposed to establish a special rate for commodity paper at this time, and also, that if we did establish such a rate that there would be no general disposition on the part of member banks to avail themselves of it. X-3494, enclosing copy of X- 3494a. ~is matter was I shall present the matter again next week at the meetings, both of our Executive Committee and of our Directors, and shall write yoa fUrther thereafter. In response to your invitation to comment, criticise or suggest, I may say that we are disposed to raise a questio.n as to the desirability of fixing a Federal Reserve bank discount rate conditioned upon the rate charged by a member bank. :Beyond this we have no suggestion to make. Yours very truly, (Signed) JOim PERRIN Chairman of the :Board. The Honorable W. P. G. Harding, Governor, Federal Reserve :Board, Washington, D. C. FEDERAL RESERVE BOARD WASHINGTON August 31, 1922·. X-3514. SUBJECT: Leave of absence, officers of Federal Reserve Banks·. Dear Sir: For the ~nformation of your Board of Directors, you are advised that the following resolution was adopted at a meeting of the Federal Reserve Board held today: RESOLVED: That in all cases where officers of Federal Reserve Banks are granted, by ~~eir :Boards of Directors, absences for a longer period than thirty days, whether for vacation or on account of illness, the amount of salary that they shall receive during such absence shall be submitted to the Federal Reserve Board for its approval. Very truly yours • Vice Governor·.. TO THE CHAIRMAN OF ALL FEDERAL RESERVE :BANKS .. .. ' : , ·,_ FEDERAL RESERVE BOARD ' :', · WASHINGTON September S, 1922. CONFIDENTIAL SUBJECT: X-3517. Functional Expense Reports, July, 1922. Dear Sir: As Chairman of the Boardas Committee on Econo~ and Efficiency, I take pleasure in enclosing herewith Functional Expense EXhibit No. 2 for July, 1922, based on the first complete expense reports by functions received from the Federal Reserve Banks, and showing for each Federal Reserve Bank and Branch the cost of operating each function and expense unit, together with the number of employees and units handled. These data are being furnished to all Federal Reserve Banks not for the purpose of disclosing operating costs in one batik to the officials in another bank, but to enable the senior officers and the Econo~ and Efficien~ Committee in each bank more intelligently to examine into their own . operating costs in the light of what is being done at other Reserve Banks. The Committee has kept in mind that conditions vary in each bank, and is aware that discrepancies still exist in the figures due to lack of full understanding of the instruction manual. The Committee believes, however, that this exhibit of costs will indicate to the senior officers and to the Econo~ and Efficiency Committees at the banks, as it has to the Board and its Committee on Econonw and Efficieney, which functions or expense units are out· Of line, and it is expected that through the use of this exhibit the Committee in each bank will be able to determine where operating costs are too high or where the figures they have reported need revision. It will be noted that separate sheets have been used for eaCh function in the preparation of the exhibit in order that data pertaining to a particular department may be given to that department without disclosing the figures of any other department, as it is the ,\ .. - 2- X-3517. desire of the Board's Committee that this information be kept for the cpnfidential use of the bank?s senior officers, the bank's Committee oh Economy and Efficiency, and department maragers directly concerned. The Secretary of the Committee, Mr. Cramer, will continue to answer any questions concerning the application of instructions in the manual. It is suggested that in certain instances you may find it desirable, after examining in detail the exhibit enclosed herewith, to communicate with some of the other Federal Reserve Banks for the purpose of determining whether or not the operating costs of a given department in your bank have been compiled on a basis comparable with that followed by such other banlts, and if so, to obtain a general outline of the operating methods at those banks with a view to improving conditions in your own bank. The Cornndttee appreciates the promptness with which the reports for the month of July have been prepared and submitted, ~nd the cooperative efforts manifested by all Federal Reserve Banks ~n an endeavor to obtain comparable operating costs for each function. Very truly yours, Chairman, Committee on Economy and Efficiency. -. FEDERAL RESERVE BOARD WASHINGTON X-3518 September 9, 1922. SUBJECT: Discussion of Federal Reserve Credit Policy at the Joint Conference of Governors and Chairmen. Dear Sir: It has been suggested to tDe Federal Reserve Board that one or more sessions of the forthcoming conference (called for October lOth) of the Governors and Chairmen with the Board should be devoted to a comprehensive discussion of FEDERAL RESERVE CBEDIT POLICY. The Board share.s this vie·~·, and follo·-·ing is the list of topics which it has been decided should form the basis of this discuss ion: 1. Vlliat object should Federal Reserve credit policy seek to accomplish and by what test may we know that it is sound? Discussion to be led by Messrs. Norris and Wills. 2. vnruat relative importance should be given to the following factors in determining such policy? a. Federal Reserve reserves. b. Interest rates in the open ~arket. c. Interest charged by member banks. d. Interest rates paid on time deposits. e. Balance of trade and inward or outward movement of gold. f. Credit conditions in, and exchanges with, leading foreign countries. g. Volume of bank loans and deposits. h. Business and industrial activity, present or prospective. i. Commodity price levels. j. Condition of security ~arkets. Discussion to be led by Messrs. Jay and Seay. X-3518 -2- 3. What light does the experience of the Federal Reserve Banks throw on the value of different methods of making their credit and discount policy effective?a. Discount rates. b. Open market operations. c. Discretion in rediscounting. d. Credit examination of merrber banks. e. Credit ratings of co:nnercial borrowers. Discussion to be led by Messrs. Strong and Perrin. 4. What is the most practicable n~thod of brin%ing about timely and coropetent co~siJeration of ~atters of credit policy by all of the Federal Reserve Banks and effective action to obtain the results aimed at? Discussion to be led by I'Tessrs. McDougal and Curt iss. In order that the discussion of the gensral subject of credit policy at the forthcoming conference may be thoroughgoing, productive, and pointed, it is desired by the Board that careful preparation and study of the topics to be considered be ~ade in advance of the confer- ence, and also that there should be a preliminary exchange of views in written form. Assignments have therefore been ~ade in connection with the program to those who are to start the discussion. Each Governor and Chairroan to whom an assignment has been wade as above, is requested to prepare a written statement on the assigned subject, not to exceed 1200 words in length. should bear a title and a brief introductory Each statement or paper paragra~h setting forth the proposition or conclusion it is intended to establish. These papers should be mimeographed and copies shculd be mailed to all other members of the conference (Governors and Chairmen of Federal Reserve Banks) \'I I ', r' ' -3- X-3518 and to member9 of the Federal Reserve Board not later than Thursday, September 28th. Each Governor and Chairwan other than those listed in the above program is requested to select one of the four main topics on the program and to prepare a memorandum of his views upon it, considering in this connection the discussion of the topic by those to whom the preparation of leading papers has been assigned. These memoranda should not exceed 600 words in length, and should bear a title and a brief introductory paragraph setting forth the proposition or conclusion the writer has intended to establish. These memoranda should be mimeographed and mailed out to all members of the conference and to members of the Federal Reserve Board not later than Friday, October 6th. should be ~ailed In adiition, 25 copies of each memorandum to the Secretary of the Federal Reserve Board. The preliminary exchange of papers and to lay the foundation for the oral Federal Reserve credit policy. merro::.~anda dis~ussion is intended at the session on Each of the topics listed in the above program will be taken up, and those to whom assignrrents have been ~ade in connection with the program will present their revised views and oonclusions in oral statements not exceeding fifteen minutes each, after which there will be a general discussion by the conference. ) ' -4- X-3518 Following the afternoon session devoted to the above program, it is proposed to devote an evening session to the question \7.hat does the present businass and credit situation indicate with reference to the prospective demand for credit and the need or advisability of any action at the present time by Federal Reserve Eanl:s with respect to matters of credit and discount policy? General discussion. Very truly yours, vr. Vl. Eoxton, ~ecretary.
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