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X-3198
September
15~
1921.
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My dear Sir!
I acknowledge receipt of your letter of the 12th instant,
and thank you for the information given regarding financial conditions
in your State.
The Federal Reser~e Board ha.s always stressed the importance
of sustaining the agricultural and live stock interests of the country
and its policies have always been shaped with a view of encouraging
member banks t~ extend all reasonable accommodations to those engaged
in these vital industries. I am sending you under separate cover a
copy of the Federal Reserve Bulletin for .August, 1921 and would invite
your attention to a letter which I addressed some time ago to Hon. Read
Smoot, United States Senator from Utah, which appears on the first and
succeeding pages of that publication.
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The liquidation which has taken place 1 at least so far as
this liquidation is reflected in the statements of the Federal Reserve
Banks, shows that the reduction in loans has been mainly in the large
cities and in industrial centers. Federal Reserve Banks are not per~
mitted by law to make loans direct to individuals 1 firms or corporations
and they can rediseount only paper which bears the endorsement of a
member bank. Consequently, in order for a Federal.Reserve Bank to
render financial assistance to those engaged in agriculture or the raising of live stock, it is necessary'".that the loans first be negotiated
with member banks, Neither the Federal Reserve Bank nor the Federal
Reserve Board has any control over the loan policy of any member bank.
We can not compel a member bank to make a loan which it does not desire
to make nor can we restrain it from making a loan whi-ch is not forbid len by law.
About one-third of the member banks in the Kansas City
District have been very heavy borrowers during the past year, another
one-third have bean only moderate borrowers, vihile the remainder have
not borrowed at all. It is po£1sible that the Federal Reserve Bank may
have called the attention of some of the larger borrowers to the advisability of reducing their discount lines at the Federal-Reserve Bank,
but in no case has the Federal_Reserve Bank undertaken to say to a
member bank just what particular loans it should call or ask be reduced.
I was formerly in the banking business myself and know something of banking psychology. Banks as a rule to not like to admit to
customers that they are short of loanable funds nor do they like to
stir up enmity in declining to make loans or in asking for reductions.
I know that in many cases they have found the Federal Reserve Bank or
the Federal Reserve Board a convenient buffer and have stated to
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borrowers or i. ould-be borrowers that they would 1 ike to grant extensions
asked for or to make 1 oans desired, but that the Federal Reserve would
not permit it, Such a procedure has a tendency to relieve the situation
as far as the local bank is concerned b.t it is not altogether fair
to the Federal Reserve System. The Federal Reserve Board has rapeatedly
issued public statements calling the attention. of the banks of the
country to the importance of granting adequate credits to farmers and
cattle men, and while the Federal Reserve Board is not a central bank
and can not discount any paper itself, it is assured by all Federal
Reserve Banks that they are ready to extend liberal accommodations to
all member banks in the way of rediscounting eligible paper.
The function::h of the Federal Reserve Board is to define eligible
paper in accordance with the terms of Section 13 of the Federal Reserve
Act} but the question of determining the goodness of paper offered for
discount rests entirely ~ith the directors of the Federal Reserve Bank.
I am sending a copy of your letter to the Governor of the Federal
Reserve Bru1k of Kansas City and have called his attention particularly
to ycur statement that your last Legislature passed a grain warehouse
law v>hich prov.ides for the taking of receipts for grain that is housed
on the farm. You ask if those receipts may not be used as a basis
for credit to farmers in Nebraska. The use of such receipts does not
affect in any way the eligibility of paper offered for discount and
v•hile the usual banking custom in making loans on warehouse receipts
is to require that the receipt be issued by some warehouseman entirely
independent 9f the borrower 1 the question of using farmers' own
receipts is one primarily for determination by the bank to which the
farmer applies for a loan and secondarily, in case the paper is offered
for rediscount to a Federal Reserve Bank~ bythe officers and directors
of the Reserve Bank,
You call attention to the desirability of aiding and encouraging
the farmer in the successful conduct of his business through the extension of reasonable credit at a rate of interest that he can afford
to pay. The Governor of toe Federal R~serve Bank of Kansas City will,
I am sure, inform you that the Kansas City Bank is ready to rediscount
good and eligible paper for member banks, but neither the Kansas City
Bank nor the Federal Reserve Board can require any member bank t o
make a loan which it does not wish to make and neither the reserve bankl
the Federal Reserve Board nor the Comptroller of the Currency has control
over the rate of interest charged, providsd it is not in excess of the
maximum rate authorized by the laws of the State in which the lending
bank is located.
I understand that the laws of Nebraska authorize a maximum
interest rate cof ten per cent per annum, The progressive rate which prevailed for some months at the Federal Reserve Bank of Kansas City was
abrogated last June and all rediscounts madeby that bank are now at a
flat rate of six per cent per annum, regardless of the amount of accommodation e.~Ctended to the borrowing, member bank, I have before me a
report of bills discounted for member banks by the Omaha Branch of the
Federal Reserve Banko£ Kansas City on September 9,. 1921. This report
shows that lll notes, aggregating $1,031 1 6)5.09, were discounted for
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twenty-one member banks, by. the Omaha Branch Ban~ on that date, all at
the rate of six per cent per annum. The report shows also the rate of
interest charged the customer~ by the borrovv ing member banks. This
report shows that in the caee of 52 notes the bcrrov-ving banks charged
their customers 1~, on 21 notes they charged 9% 1 on 2 notes 8~% 1 on
14 notes 6%, on 13 notes 7-z%, on 5 notes 7%, on 2 notes 6a% and on 2
notes 6%.
Under an neal operation of the Federal Reserve System, it is
not intended that a member bank should make a profit on its rediscount
transactions with the Federal Reserve Bank. The object of the Federal
Reserve System is to afford a ready discount market but member banks
generally, especially in the West and South, seem to have an idea that
they should make a profit on such transactions. In some states where
the maximum legal rate of interest is six per cent and the Federal
Reserve rate ie also six per cent, no profit is possible, but in states
where the laws permit of rates as high as ten and tvvelve per cent,
there is, of course 1 an opportunity for a very substantial profit. For
example, where a bank in Nebraska is able to rediscount at the Federal
Reserve Bank at six per cent per annum paper which it has taken from
its customer at ten per cent) the profit is 66 2/3 per cent.
If the
paper is taken at nine per cent, the profit is 50%, or if at eight per
cent, the profit is 33 1/3 per cent.
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I sincerely hope that banks generally will recognize the fact
that by charging lower rates of interest they would be building up their
own communities and would in the long run reap greater profit themselves 1
than would be the case if they should continue to charge all the law
allows or all the traffic will bear.
The abrogation of the progressive rate has made it possible
for banks in Ne~raska to make a large percentage of profit on their
rediscount transactions with the Federal Reserve Bank 1 but the daily
statements made to the Board do not indicate that the Nebraska banks,
as a rule 1 have shared thi.s advantage with their borrowers. Is there
any reason to believe that in case the discount rate at the Federal
Reserve Bank of Kansas City should be still further reduced the
Nebraska banks would give their customers lower rates than they do
at ·present 1
Very truly yours,
(Signed) W.P. G, HARDING
G o v e r n o r.
Hon. Samuel R, McKelvie,
Governor of Ne~raaka 1
Lincoln1 Nebraska.
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COPY
STftTE OF NEBRASKA
EXECUTIVE OFFICE
X-3198a
Lincoln
September 12, 1921.
Ron. W.P.G, Harding,
Governor of Federal Reserve Bank
Washington, D. C.
My dear Sir:
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As the result of an inquiry that I have just concluded among Nebraska bankers, I am convinced that financial and
business conditions are improving throughout this State, but I
am also convinced that there is need for credit relief for the
farmers and cattlemen in this territory n~i 1 and it is regarding
this situation that I address you •
The simple fact is that the urgent demand for liquidation and the contraction of credit during the past twelve months
has imposed unusual and extraordinary ha:rdshlps upon the farmers
and cattlemen, In order that these demands could be met, the
farmer has taken heavy losses in the sale of g.ra~.n and livestock.
It is true that bank deposits and reserves t.ave im~roved during
tnis period, but this improvement has heen accomplished at the
expense of interests that should have been protected and conserved.
The qaestion now is whether this policy of enforced
liquidation is to be continued, or whether the farmer is going to
be aided and encouraged in the successful conduct of his business
through the extension of reasonable credit at a rate of interest
that he can afford to pay. You will bear with me, I am sure,
while I point out some of the tangible results of the system that
has been invoked during tne past tVHi'lve months.
The losses that have been taken by cattlemen during
this twelve months have represente4 actual financial ruin to many 1
and the permanence of the oattle breeding and feeding industry in
thia territory is actually menaced nmv. In addition to the
r~inous losses that have been taken on stock that was properly
fitted for market .. tnere has been a very large disposition of
partially finished stock: of breeding stock and of young stock
that snould never have gone to market at all. The injury to the
cattle industry from this source will be felt for years to come
and something should be done to encourage this industry. As it
·is now, cattlemen are actually being forced out of business, in
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-2order that they may meet their obligations. Nor does this include
merely the speculator or the one who used bad judgment in his operations. It includes the most substantial and forehanded breeders
and feeders that we have in this section.
The grain gr~1ers have been affected similarly. For instance
more than half of this year's wheat crop has been marketed. The
price has been around $1.00 per bushel 1 al1.d while this would hardly
remunerate the farmer for the cost of production, there has been no
general complaint against the price. Now the terminal markets are
congested and the farmers are being counselled by no less an authority
than Hon. Herbert Hoover 1 Secretary of the Department of Commerce)
to withhold shipments. This counsel, however good it may be, could
not have been fallowed had it come even before the wheat crop was
harvested, for a very large number of ~farmers were compelled to sell
in order that they could meet pressing obligations. The danger that
lurks in this situation is not that the fanner has sold at a price
that was not entirely satisfactory, or that the terminal markets
have been f loaded, but that there is the strong probability of a
higher price for wheat before another cro1) is grown., and should this
condition obtain1 it is quite apparent that the fanner is not the
one who will receive the benefit.
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The corn crop in this territory is unusually large, and there
is a very considerable percentage of last year's corn crop still on
hand. The price ranges around 30~ per bushel at country elevators.
This price is so far below the cost of production that the returns
from this year's cop will scarcely maintainthe operations of the
farmer, to ·say nothing of meeting the obligations that he is now
being pres sed to pay. · If this corn a:rop must be forced up on the
market as the wheat crop has been, then the pri~e •vill probably go
still lower•
Much of the corn crop will be fed to hogs. If prices continue
at a fair level this will afford a source of very satisfactory relief.
Some of it will be fed to Dattle andthis 1 too, will prove profitable
if present prices prevail, but it will take ti:ne and cre~it encouragement to enable this 1 and I believe that the farming interests of this
country have a right to look to the Federal Reserve Bank System for
this encouragement.
I am not unmindful of the relief that is being offered now
through certain private banking sources, as well as from the War
Finance Corporation. These are good and the work that is being done
by them should not in any sense be disparaged 1 but with the Federal
Reserve Banks holding 7o% of the reserves., it seems apparent that
here lies the medium through which additional credit may be afforded
at a much more reasonable rate of interest than is now required.
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Especial consideration should be shown to the cattle interests1
both to breeders and feeders. If this is done, i t will also greatly
aid the grain growers, for it will afford a profitable outlet for
a product that must otherwise be sold at a loss,
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Our last Legislature passed the Grain Warehouse Law 1 which
provides for the taking of receipts for grain that is housed on the
farm. I am wondering if these receipts may not be used.as the basis
for credit to farmers in this State.
I do not want to burden you with a further enumeration of these
facts, though I may say that I have only touched the high spots.
Nor would I have you believe for a moment that I would have the
Federal Reserve Bank System encourage an extension ofcredit that
would result in unwise inflation or speculation. Too much of that
has been done already. But I would like to see the Federal Reserve
System operate as an agency for financial. :relief at a time when it
is most urgently needed, May I be advised of anything that you think
may be done to help us out?
Very truly youre 1
(Signed) Samuel R. McKelvie .
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Governor •
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@FedFRASER