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Ex-Officio W . P . G. HARDING, GOVERNOR P A U L M. WARBURG, VICE GOVERNOR FREDERIC A. DELANO ADOLPH C. M ILLER CHARLES S. HAMLIN members W ILLIAM G. McADOO SECRETARY OF THE TREASURY CHAIRMAN JOHN SKELTON W ILLIAM S COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD-503 H. PARKER W IL L IS . SECRETARY SHERMAN P. ALLE N , ASST. SECRETARY AND FISCAL AGENT ADDRESS REPLY TO WASHINGTON FEDERAL RESERVE BOARD November 14, 1917. Copy of lettor to a Federal Reserve agent regarding endorsement of paper sold by one Federal Reserve bank to another: Dear Sir: Receipt is acknowledged of your letter of November 6th in which you ask whether the Federal Reserve Rink of Nov/ York should not have ondorsed the §5,005,CKI of bankers* acceptances which you bought recently from that bank in accordance with the suggestion of the Federal Reserve Board. j Your point Is well taken and tho question was fully discussed by tho Board when tho transaction was arranged. In reviewing the conditions which led to this transaction, it should bo rememborod that the Federal Reserve banks, with hardly any exception, have been accustomed, with the approval of the Board, to invest liberally in bankers’ acceptances which #*re purchasod for them by tho Federal Reserve Bank of New York. These transactions have been regularly engaged in and on a largo scale,.particularly by those banks which, like your own, did not find a sufficient fiold of investment in their own districts, Tho Now York acceptance market has thus been developed to a considerable degree by the combined operations of the Federal Reserve banks. It has frequently happened that the F>deral Reserve Bank of New York has given other Fedora! Reserve banks larger partici pations in those bankers’ acceptances than it would have desired had the matter been looked upon from the viewpoint of its own interest alono. Those liberal participations have been given other Federal Reserve banks when the New jfork bank’s earnings wore not sufficient to meet its own dividend roquireraonts, while the other banks, by receiving a liberal allotment of acceptances purchased in New York, were enabled thereby to make a better showing in the matter of earnings. There have boon other occasions when the Federal Reserve banks have discontinued their purchases in anticipation of heavy demands in their own districts, thus throwing the whole burden of sustaining the acceptance market upon the Federal Reserve Bank of Now York. In this way they conserve their own resources, while the reserves of the Federal Reserve Bank of New York wore correspondingly reduced because of the larger part of the burden which it had to assume. These facts are brought i» your attention for the purpose of emphasizing the point that a partici pation in tho purchase of acceptances is not only a privilege but that it i§ iyetffaps a duty also, the measure of which can hardly be gauged by the X**503 if 2 • convenience cf any individual bank* Final responsibility in the matter rests under the law upon the Federal Reserve Board, and it may become necessary for the Board in the future to undertake a more complete regulation of these functions. In suggesting to a number of Federal Reserve Banks which were in a strong position, to purchase bankers’ acceptances from the Federal Reserve Bank of New York, the Board asked merely that they resume their purchases of acceptances in the manner in which they had engaged in these transactions heretofore; i.e., without the endorsement of the Federal Reserve Bank of Now York. The Board anticipates that-there will beb a quick change in banking conditions shortly after the fifteenth instant, when the pressure on New York should diminish and bear heavier upon some of the other districts. From this point of view, the most natural operation perhaps would have been the rediscount by other Federal Reserve banks of the fifteen day member banks* collateral papet?-, of i»4iich the Federal Reserve Bank of New York holds a very large amount at this time. Such a transaction, however,would necessarily have been dealt v/ith as a rediscount, as it would have involved single name collateral notes of member banks taken under Section 13, endorsed by the Federal Reserve Bank of New York under instructions fra® the Federal Reserve Board* It would have been necessary to show a transaction of this kind in the weekly statement, thereby creating more or less comment, which might have been undesirable in the present circumstances, and the Board felt, there’* fore, that it would be better for the adjustment to take the form of a sale of acceptances suggested by the Board rather than by a rediscount transaction ordered by the Board. The Board understands, of course, tfckt in any case where a rediscount operation is ordered, Federal Reserve banks should have the right to require that the paper bear the endorse-r ment of the selling bank; but where the Board invited the banks to resume purchases of bankers' acceptances upon the same conditions which have prevailed hitherto, it was felt that there was no necessity for requiring an endorsement. Had any bank to which the Board suggested a purchase, stipulated that the paper should be endorsed, the Federal Reserve Bank of New York, in that event, would have been called upon to decide whether it wouldoprefer not to consider the proposed sale. While your letter was in transit the Board effected a second transaction of this kind. When the Federal Reserve bank governors were X-503 * 3 - assembled here last Thursday, some of them, whose banks were in a par ticularly strong position, were asked if they were willing to take from the Federal Reserve Bank of Mew York a specified amount of bankers' acceptances. Without hesitation they all stated their willingness to do so. This transaction also had the character of a voluntary purchase on the part o,f the Federal Reserve banfcs, upon the suggestion of the Federal Reserve Board, and as there was ho compulsion in the natter, the endorsement of the Federal Reserve Bank of New York was not required • Respectfully yours, W, P. Or. HARDJHG; Governor,
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