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(COPY ) X-4486 2B9 SOUTHERN PACIFIC COMPANY • 65 Market Street Son Francisco • Wm. Sproule, President. Decemoer 24, 1925. Honoraole C. S. Hamlin, Federal Reserve Board, United States Treasury Bldg., Washington, D. C. ~ Dear Mr. Hamlin: I have yours of 11th instant and have not forgotten your desire for a memorandum of the bank organization that would seem to be more effective ... .. than the present • My views are given with some reluctance lest they be deemed a presumption or mischievous. Fact is the suggestions offered are of value only as they are con- • structive toward putting the Federal Reserve Board in such control of the batiks as will cause them to function in their daily work upon policies suggested by ... the. Federal Reserve Board, with local renresentation in carrying out the policies effectively, which will give recognition to the Government's interest in the not returns from each bank, requiring adoquato supervision of the bank's operations. .. In this I do not refer to one bruik but to any Federal Reserve Bank • I think it better to put tho momoro.ndum in detached form, rmrkod 11 Controlling Influences in Federal Reserve Ba-~ks. 11 Yours truly, • • Encl .. P.S.--I have been qQito free in expressing myself in tho memorandum as I understand it to be so desired, ffi1d confidential • (signed) Wm. Sproule w.s. 300 -2- X-4486 Controlling L1flu.::::"ces in Fed.eral Reserve :Ba"lks • A co:1trollbg i:1flue:1ce in a Federal Reserve :Ban.k: is either in Washington or is local. The IJa::.lap:cr of tho Bo.nk is aut to be selected by the local majority ... in the directory of the :Bank, whose feelinG is apt to be that the local interests in the area served by the Bank are best protected by strengthening the Ma:i.1ager, who is elected by will of tho local r.aajori ty oven ':7hcn tho election is unanimous. A Manager not agreeable to the local majority in its directory could not be elected • • The r;fanager should be the Manager of the Bank in the conduct of its • daily transactions and general routL1e; but this is not the way it works. He starts with the title of Governor, which is a misnomer. Governor; nei thor is he a Managing Director. not be. He is not a Director a"ld should His business should be to run the Bailk as an organization, under the direction of the Board of Governors. . He is not a The :Board of Governors are merely given, for convenience, the more general title of :Board of Directors. Board of Governors should give its instructions to the Manager. The The Manager should be given these instructions through the Chairman of the Board of .. 1 Governors (i.e. Directors.) Chai~~ of the Board and Federal Reserve Agent is the only of- ficial of the Bank named in the statute. are joint &1d continuous. • As such, his official fUnctions He should not be expected to abdicate either of his joint functions at any time. His chairmanship should not cease when the meeting of the Directors adjourns, any more than his fUnctions as Federal ... Reserve .Agent cease vrho~1 the Directors have meeting.' The duties of the 30:1 X-4486 -3- Chairrna:'l of the Board of Directors and Federal Reserve J~ent are lodged in • one official to the end that he should be directed as to general policies by the Federal Reserve Board ru1d so give direction to the policy of • ... Board of Directors. tl~ As policies of management arise from time to time, which warrant consideration in Washil~ton at the instance of the Bauk, the questio:1s should be presented tl1rough the Chai1~~1 of the Board of Directors. Recor:ni tion of this official by the Board as their direct and resoonsible representative is imnort~~t. 1l1y procedure that tends to sub- merge him, or go past him in the transactions of the Federal Reserve Board • with the ba1~~. impairs his usefulness to the Board and does :1ot tend in tho direction of strengthening the Board. By virtue of his office he should be Chairman of all commi tteos, ond vote h1 commi ttoe. .. The Chairnuu1 of the Board and Federal Reserve ~\gent should be re- garded not only as the official representative of the Federal Reserve Board; it should be known that he is also the direct adviser of the Board by virtue • of the joint office and its statutory Character. As your adviser, his calls to Washington could well be separate and distinct from your calls upon the Governor for conference with the latter. The calls upon the Governor by the Federal Reserve.Board should be through the Statutory Officer, and it could well be made optional with him as to whether he should go to Washington for the same conference or not, unless your Board wishes him . specifically to go. When he so goes, the conference to be so handled tba. t the Statutory Officerts official relationship to the Board is given the importm1ce of the position, without being in any way made offensive in the • Governors. He should have precedence. 302 -4~ven X-4486 matter of conmensation should be dealt with according to common usage, which is in terms of salary. By virtue of his office yhe Statutory Officer has to perform regular daily duties, maintaining and being responsible for an organization with office and field forces. In business lifo, terms of such responsibility are interpreted in terms of compensation. Alike to offi- cers and ewgloyos of tho Bank and of the Federal Reserve Jlgent, the senior officer of highest responsibility is trult officer whoso compensation is the greatest. With the lAanager of the B~~ getting $25,000 a year, for example, the Statutory Officer should be paid not less than $30,000 as a mere raatter of wholesome organization. The Federal Reserve Board, of course, in matters of detail ca1n1ot control the routine of the Ba1k 1 s business, but can deal with discount rates, open market operations, unusual credits given or ~reposed to be given by any Reserve Ba1k to any of its member Bariks; also with policies under one-product conditions which call for special consideration ond caution in granting or withholding of credit, or other conditions of an abnormal character arising from time to time. sho~ These are dealt with now in mixed fashion. The open operations are under the Governor for instance, although such operations belong to the realm of policy in which the voice of the Statutory Officer might properly have weight. The givi~g of credits is in charge of 001 Exe- cutive Committee the Chair~n of which is tho Governor ~ho is not a Director. It is true, as a further ex~)le, that ~~e Federal Reserve ~\gent is supposed to be a check on the paper submitted for loans but this is in the nature of a11 unpleasa.1t veto pouer, of which I understand he has been deprived by a ruling that makes the Executive Committee's action final. i Loan Committee might be created to consist of the Chairman, ao3 X-4486 -5- Deputy Chainnan, a member of the Bank 1 s Board representing the mujor Banks, ~~d one representing tho minor Bonks, each of these four members to vote. This would give two Class C Directors a11d two of the Directors representing member Bonks, so that all interests would be protected. There would seldom be a tie, but a tie would have the effect of negative action. It should not be too easy to tie up the reserve of the Bru1ks in doubtful cases. The losses to the B8.l.J.ks through bad loans. might well be checked up for closer L1forffi3,tion. There is no rule tr~t takes the place of consideration of question as to whether member Banks 1 capital is unimpaired, value a:1d character of its surplus, and the sounlli~ess of its m~1agement. True, in these three, Wash- ington's interest is general but it is not remote, because it runs not only to-the returns derived by the Government from the Reserve Banks 1 operations, - it nu1s finally to the soun~~ess of the member Bank in its relations to the depositors the Reserve System is in part designed to protect. The Manager of the Bank may sit ex officio as now with the Board of Directors, without vote, to give them information they require. In like manner and for same purpose, he could sit in the Loan Committee or in any other com<nittee desirable. In matters of poli~r. it may occur from time to time that there are differences of opinion upon matters deemed material. matters of appointments. The Federal Reserve ~oard This may occur even in could require that in such cases whenever the Chairman of the Board and one or both of the Class C members dissent from the vote of the majority, the subjects are to be submitted to the Federal Reserve Board with statement of the vote and reasons for or against, to the end that approval may be given or denied as advisable, the ~1air1~"1. to decide uuon wisdom of such submission to Washington. 304 X-4486 -6- In su.rmnary, the "9resen t vrorking of Federal Reserve Bank organization is centrifugal so to spea~:. The Federal Reserve Boord, on the con- trary, is interested in Reserve Ba11k organization that will have a centripetal tendency, in preserving the proper relation and influence of Washington within the councils of the Bank. This can still be done by the firm and consistent attitude of Washington in support of the Chairman of the Board and Federal Reserve Agent as a joint officer who functions in that duel official relation continuously and not intermittently. As such, Washington looks to him to be the dominant factor in conserving the interests of Government in the stability of the Federal Reserve Banks, and their functioning as a system of Banks rather than as widely scattered banking units. The Federal Reserve Board has to decide whether tho Manager of the Bank is the dominant figure in the Board, or the Statutory Officer is to be that figure. If the Manager is to be dominant, then the Chairman of the Board is merely the person designated to preside when there is a Directors' oeeting, which is the present drift. As to which it is to be, this is for Washington to decide in order that the present unseemly uncertainties may be brought to a conclusion, even though that conclusion be gradual once the policy is fixed and consistently adhered to. Putting the moral influence of the Board strongly behind the Statutory Officer in the Bank, will alone be a start in the direction desired, and the councils of the Bank should gradually be reorganized to fit. No one Balli( serves for criterion. The Board might consider it well to call into council three or more Directors of the broadest experience from Class C in three or more Federal Reserve Banks, if Washington is not satisfied with the present tre~d of Reserve Banks. The trend appears to be ... 305 X-4486 -7- the localizing of tho Reserve Bonks in view of the Class C Directors being in a ninority. With strong Cfr~irnen strongly supported by Washington, that support gradually established, but pursuant to a fixed policy interpreted by regulations issued from time to t~e, there should come without undue friction a better recognition of the immediate interest of Government in ~!. .... ·'' the conduct of the Bank, both as to policies and as to conservation of the capital resources of the Bank and of its member Banks, that the reserves may be put to their best uses ,e and providently •. It· may be conceded tba t such a change would make the chairmanship the d.ominan t place and the Manager of the Bank would run the nachine under the dominating influence of the Statutory Officer. If the Federal Reserve ba.11king system is to have the Fe:deral Reserve Board for its hub, i.t would seem that this policy ~~ll become necessary, whatever nay be the 1~chinery designed to carry it out •. Otherwise there seems to be little reason why the Federal Reserve Board's influence in the Banks should be any more than merely to enable the Directors of the Banks to get by without conflict with the Federal Reserve Act. The fact is that defects in the law leave undefined the fUnctions of these officers and so cmllenge human nature. r~n for conditions of conflict they have not created but of which they are the victims• This will have to be corrected sooner or later. San Francisco, Cal., .. It is not fair to blaDe December 24, 1925 •
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