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,.
A
DDRE S S
by
E. H. CUNlTINGH.Arr:, T.'IENIDER
FEDERJ;L RESERVE BOARD.
l."F.ASHING-TON, D. C.
Delivered December 12th, 1923.
AMERICAN FAliM BUREP_U FEDERATION CQlllVEFTION
Chicago, Illinois.
Released for Publication December 12th, 1923. (noon).
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,.-.
TI-<:E FEDERLL F.ESERVE
SYS~EM
X-3903
The general purposes of the Federal Reserve System are well defined
in the title of the Federal Reserve Act, which w-as p.:'>.ssed in 1313 o.nd approved on December 23 of that year.
The full title of this Act reads as
follows:
"An
.~ct
to provide for the establishment of Federal
Reserve Banks, to furnish an elastic currency, to
afford means of rediscounting comnercial paper, to
establish a more effective supervision of bariliing
in the United States, and for other purposes."
The two princiral functions mentioned in the title of the Act are thus to
furnish an elastic currency and to afford means of rediscounting corrJT,ercial paper.
Both of these purposes clearly indicate that the Federal Re-
serve System is intended primarily to supply short-term credit, because
elastic currency must necessarily be based on current transactions, and
the rediscounting of "comnercial 11 paper means the extension of credit on
paper arising out of the current needs of production or distribution in
agriculture, industry and trade.
the Federal Reserve System is a
Both funttions, therefore, indicate that
co~mercial
tanking system organized to finance
current short term operations, as distinguished from the Farm Loan System
and the Intermediate Credit Banks, which were organized for the purpose of
providing longer term credit.
The limitations upon the character and
~..aturity
of the paper eligible for discount by the Reserve Panks, therefore, arise
from the fundamental purposes for which the System was created.
NlF.MBERSHIP
For purposes of Reserve Banking the United States is divided into
X-390J
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.-
·.~>,
-. J/f,
twelve districts, each district having a Federal Peserve Bank, which
in rrany respects is entirely independent of the otber Reserve Banks and
of the Federal Reserve Board.
long to the Federal Reserve
All the national banl:s in a district be-
S~rstem
and must subscribe as their share
to the bank•s capital an amount equal to six per cent
capital and surplus, three per cent
(6%) of their own
(3%) of which must be paid in cash
at the time the membership is acquired; the rerrainder being subject to
call.
Banks having state charters are permitted to join the Federal
Reserve System i f they so desire end if their capital and the character
of their business are s;;.ch as to rr.a.Jr·e them eligible for membership.
Upon
joining the System they are required to subscribe to the capital stock
of the Reserve Bank on the same ratio as national banks.
State bar~s
which join the System retain all their charter privileges so far as they
are not ·in conflict with the Federal Reserve Jet and State banks rray
withdraw from membership at any time upon six months' notice.
The Federal
Reserve System, threfore, is owned by its member banks who are the stock•
holders and no part of the stock belongs to the Government.
It is not a
Governmental institution, but a co-operative enterprise of bankers o\vned
and largely controlled by them.
ORG.ANIZAT ION
The Federal Reserve Banks are administere1 ty a Board of nine (9)
Directors divided into three classes:
Class '~" Directors are selected
from among leading bankers in the district;
Class "B" Directors represent
commercial, industrial, and agricultural interests in the district, and
Class "C" Directors are appointed by the Federal Reserve Board to represent
the Government and the general public.
Class "A" and Class "B" Directors
j'-
\
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--.. (..,..
,L,,,
X-3903
{',·'
are e.lected by the Member fanl:s, the Government appointing only onethird of the Directors.
For the p1rpose of selecting Class rrAn and
Class "D" Directors the banks in each Federal Reserve District are
divided into three groups, consisting respectively of large, medium
and srrall banks, each class having in the aggregate an equal
of votes.
rr~ber
This insures the Federal Reserve Banks from being controlled
largely by the big banks as they would be if the votes were in proportion
to resources, or by srrall banks as would be the case if every member
bank had one vote regardless of its size.
This plan assures the banks
of a directorate representative of the business interests and of the
various classes of banks in the district.
The Federal Reserve Board consists of eight members, the Secretary
of the Treasury and the Comptroller of the Currency ex-officio, and six
other members appointed by the President of the United States and confirmed by the Senate,
"In selecting the six appointive members of the
Federal Reserve Board, not more than one of whom shall be selected from
any one Federal Reserve District, the President shall have due regard
to a fair representation of the financial, agricultural, industrial, and
commercial interests, and geographical divisions of the counvy.n
So
that the Federal Reserve Board is a body of men selected fromvarious parts
of the United States who are representative of the various activities of
the country, and to these men is entrusted the function of welding the
twelve regional Reserve
Ba1~s
into one System which is operated on con-
sistent principles and can be depended upon for united action when emergency
arises.
There is a clear distinction between the Federal Reserve Banks and
... 4...
the Federal Reserve Board.
X-3903
This distinction is very often overlooked
when criticisms are offered as against the function or operation of the
System as the Board is often criticised for action taken, when, in reality,
it is the action of the Federal Reserve Bank,
~~d
vica versa.
As the
Federal Reserve Danks are held responsible for their capital stock, and
as the business of banking varies in different sections of the country,
Congress deemed it advisable to make each Federal Reserve Bank a separate
corporation and defined the limits of a bank's corporate powers in the
act, while it left to the Federal Reserve Board the determination of broad
questions of policy in order that the banks might function harmoniously
as a unit and rally to the aid of each other in times of special stress
or combine their force in case of a national emergency.
FUFCTIONS OF THE B.AFYS.
The chief functions of the Federal Reserve Eanks rray be briefly
described as follows:
e.A) Rediscounting for Member Banks.
'V!hen a member
bank finds that its customers are in need of more credit than it is
able to give them on the basis of its own resources, it can turn to the
Federal Reserve Bank and rediscount with it some of the paper upon which
it has made loans to its customers.
This paper, however, in order to be
eligible under the law must generally arise out of an actual transaction
connected with the production or distribution of corrmodities.
Paper can-
not be rediscounted with a Federal Reserve Bank if the proceeds were used
for speculation; for perrranent investment, or for carrying stocks and
bonds, except
obli~tions
of the United States Government.
So that the
Federal Reserve Banks' operations are specifically intended to serve
current credit needs • .Another limitation upon the paper, having the same
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general purpose, is in connection with the length of t irne for which
Reserve Banks are permitted to discount paper.
For ordinary commercial
and industrial paper the maturity is limited to 90 da;{s and for
cultural paper to nine (9) rr:onths.
agri-
The re&son thal agricultural p_aper
is allowGd. longer rraturi ty is that agricu1tural operations generally re-
operations.
There is in this no departure from the principle that Re-
serve Bank credit
mu~t
be employed to finance short-term current operations
rather than long-term enterprises.
In extending credit to their members
the Reserve Dan}:s are guided by their ::.:-oards of Directors and by loan
co~plete
committees appointed by Directors who have
w.atter under the law.
discretion in the
In 'rediscountir..g paper or obtaining ad.vances from
the Federal Reserve Banks, the Member Banks deal only with the Federal Reserve tanks and the Federal Reserve
act within the law.
~oard
cannot interfere so long as they
The Federal Reserve Joard cannot require any Federal
Reserve :an}: to make any loan or rediscount any paper nor can it require
any Fe1eral Reserve Dank to refuse any loan or to refuse to reiiscount
any paper which is eligible for rediscount.
(B)
The Fe1eral Reserve Danks are authorized to issue Federal Reserve
Notes in exchange for gold or for paper eligible for discount.
Througt
this power of note issue the Reserve Ilan}~s are able to supply the Member
Danks with liquid currency that allows theri, to meet every legitimate denand of the district for add.itional credit beyond the ba:rt..ks' mvn resources.
If I might presume to give you a clear picture of this idea in
practice I would assume that a given corrmunity has an a-ctual need for
additional credit.
local bank.
The need is apparent ty the requestsfor loans at the
The bany
•
in order to meet the needs of its customer, turns
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X-3903
to the Reserve Bank and borro1t1S say $100,000 from its Federal Reserve j;lank
by radiscounting some of its
eligiole paper.
The Federal Reserve Dank
needing additional f1mds to take care of the needs of its Member
~anks,
pledges this $100,000 of rediscounted paper with the Federal Reserve Agent
and obtains flOO,OOO in Federal Reserve notes, which it pays over to its
Member Bank for the paper rediscounted by it.
pays out this
~100,000
The Member Dank lends or
of Federal Reserve notes in its community, and thus
they are put into circulation and the total volume of currency in circulation increased or "expanded" in t!le amount of $100,000.
V?hen the re-
discounted paper pledged as security for the Federal Reserve notes matures
and is paid off, the Federal Reserve Bank must either substitute other
collateral (eligible paper or gold) or retire the notes.
needs of the
co~nronity
If the credit
have decreased in the meantime, the notes probably'
will have been returned to the Federal Reserve Bank, either through its
Member
~ank
them.
Possibly some of them will be paid to the Federal Reserve Bank in
or through other Federal Reserve Banks, and it will retire
payment for the very paper which it had pledged as collateral for their
issuance, and their retirement will be practically
auto~atic.
\Vhen the
underlying commercial paper is paid off and the Federal Reserve notes are
retired the total value of currency in circulation will have been decreased or "contracted" $100,000.
In this way the total
vol~e
of Federal
Reserve note currency automatically expands and contracts to accommodate
the changing needs of commerce, industry and agriculture.
A Federal Re-
serve Dank cannot get Federal Reserve notes without putting up lOOfo commercial or agricultural paper or gold itself as security, and when the
volume of available commercial or agricultural paper decreases it must
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X-3303
either retire the currency or put up gold as security.
If I have made myself clear
you
have in your mind a picture of how
the elastic currency of the Federal Reserve works in practice.
You have
seen (1st) •~ere the necessity for it originated out in the district;·(2nd)
how the Member :Dank acquired it by offering eligible paper of its customers
equal to lOO(o as security; (3rd) how the money went into general circulation
through the channels of trade and industry; (4th) how the currency is retired
auto~atically
when the credit needs of the community no longer re-
quire its circulation.
The Reserve Danks have no power to issue notes except in exchange for
gold or eligible paper.
They cannot create currency out of nothing.
The
need for the notes must arise out of the actual requirements of the community.
The Federal Reserve Notes are first liens on the assets of
the
Reserve ranks and are also obligations of the United States Government.
They are
redee~able
in gold at the Treasury of the United States and in
gold or lawful money at any Reserve
t~nl:.,
and a 40 per cent minimum gold
reserve must always be naintained againstthem.
In the early periods of the system, the use of Federal.Reserve Notes
as additional currency credit was not generally re.sorted to in times of
increased demand
continued and
.2!_.neces~ity
~inally
for additional credit, but as the i'!orld
involved America the
de~.and
~.'Tar
for currency with which
to carry on and adequately finance the business needs on account of the
great inflation in prices.
increased very rapidly.
On January
lst, 1917, just before we went into the war, the outstanding Federal Reserve
~otes
amounted to $17,558,100.
On January 1st, 1915, the amount was
$1,350,764,225.
On January lst, 1919, the amount had increased to $2,S59,S43,920.
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On January lst, 1920, this amount had increase to $3,235,789,145.
Jlnd on December 23rd, 1320, it reached its peak of t3,404,j31,000. in actual
circulation.
Since that date the tendency in the main has been dovv.nward and on November 28th, 1923, it stood at $2,245,000,000.
The high discount rate of six per cent (6~) effected by the Reserve
Danks in January and February 1 1920, was undoubtedly to be taken as a
warning that expansion was reaching a hiih point and having its effect on
:legal reserves which were declining, with the thought, undcubtedly,that
this high rate of discount would have the effect of slowing down the derrand for money.
On the contrary - and to the surprise and astonishment
of all, past experiences and practices reversed themselves and the demand
for money began to increase.
of the Reserve :Sanks to
71:
Early in June the rate was increased in four
without any apparent effect upon the demand for
money which reached its high point in. December, 1920, when the total amount
of Reserve notes issued and in circulation totaled- $3,404,931,000.
The statement made by a former Comptroller of the Currency to the
effect that the largest amount the National ranks of the country had ever
borrowed in one year prior to 1313 through
r~discounts
and bills payable
was - $100,000,000 brings most forcibly to our attention the almost incomprehensible figures to which the country's credit had_ been expanded since
the inauguration of the Federal Reserve System.
The discount rates of the System have varied greatly at different
times,
However, when we recall the conditions through which the country
has passed since the System was established in 1914, it does not appear
in any sense unjustified.
In view of the
ahnor~al
conditions resulting
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from the World V'ar with its attendant inflation, so natural to carrying en
war activities, the Post-':":ar period when every line of production was more
or less over-stimulated together with the tendency toward extravagance and
speculation and added thereto, the further obligation of the Federal Reserve System to act as Fiscal .Agents for the Goverl'l!pent in financing the
war Which required the floating of over
~20,0QO,OOO,OOO
of ronds together
with a large amount of short time government obligations, it quite naturally
was to be expected that discount rates should or would vary quite materially.
The discount rate of six per cent
in 1914.
(5~)
was established with the System
Between 1914 and January, 1920, ·the rate varied but never again ·
reached G~ until the latter part of January, 1920, and later in 1920, went
up to 7~ in Boston, New York, Chicago and Mi~~eapolis.
(C)
The Federal Reserve Banks hold all the lawful reserves of the Member
I:a.nl<s, that is, nothing that a Member :ank holds, h1>.t even gold or other
cash in its vaults, counts as reserve by law, except the
deposit with the Federal Reserve
~an}.
arr~unts
held on
The concentration of reserves and
rraking them available at any point within the System, and at any time, has
made it possible to reduce reserve requirements and at the same time renders
banking much safer throughout the country.
The Reserve Act has reduced
the requirements for reserves on demand deposits from twenty-five per cent
(25~) in reserve cities to ten per cent (10~), and on time deposits from
twenty-five per cent (25%) to three per cent (3~)j and in country banks the
reduction has been from fifteen per cent (151) to seven per cent (7~) on
demand deposits and from fifteen to three per cent (3~) on time deposits,
·There is no doubt that the Federal Reserve System through its reserve
policy is rendering the country a great service in rr.aintaining the integrity
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X-39C3
of deposit reserves, and in pooling these reserves in order that they may
be available in time of need to the Hember I?anl s and to any other function
of the System.
One of the greatest deficiencies in the old banking system prior to
the enactment of the Federal Reserve Act, was the system of maintaining
bank reserves consisting partly of cash in vault and partly of balances
with correspondent banks which in turn carried psrt of their reserves in
the form of balances with other banks which were permitted to lend a large
part of such reserve deposits to their customers so that the ultimate reserves of the country were invested in loans which might not be collectible
in the time of need.
filld the greatest deficiency in our present banking
system results from the continuance of this very same practice by banks which
are not members of the Federal Reserve System.
A reserve intended to protect
the iepositors of a ban¥ which consists largely of loans to the patrons of
the correspondent banks cannot in its final analysis
ce
considered any more
of a reserve than the notes in the portfolio of the original bank, and it
cannot compare as a deposit protection to the reserves held in the Federal
Reserve System, which must always be protected by a gold reserve of not less
than thirty-five (35~) and in addition having the advantage of being available
for use at any point of emergency.
The history of past financial panics which have caused so much trouble
and worry
w
bankers and depositors will show in
~ractically
evary instance
that the reserves which were intended as a protection to depositors, had in
nearly every case, been dissipated and as a consequence reserve protection
was not available in the time of need.
This cannot happen under Federal Re-
serve Banking.
(D)
In addition to clearing intra-district checks the Federal Reserve
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X-3903
System has set up a ms.chinery by which talances cetneen districts can be
settled lty book entries without the shipmant of cash.
This is done through
the gold settlement fund in Vlashington held in custody by the Rederal Reserve Board.
Each reserve bank has placed with the Reserve :card a part
of its reserves and whenever one reserve bank wishes to transfer funds to
another it does so by wiring to the Doard to
the bool.s of the gold settlement fund.
~ake
an appropriate entry on
The Board daily notifies each Re-
serve Dank of the total debits and credits to its account and of the amount
of gold it owned at the end of the previous day'a business.
This plan has
done away with exchange charges for drafts within the country; has eliminated much time lost and expense incurred in the shipment of currency and
has made business dealings between different parts of the country more
expeditious and e conomi cal ..
EARNINGS.
Par.
55-
Section
7.
"-After all necessary expenses of a Federal Reserve Dank
have been paid or provided for, the stockholders shall
be entitled to receive an annual dividend of six per
centum on the paid-in capital stock, which dividend shall
be cumulative. After the aforesaid dividend claims have
been fully met, the net earnings shall be paid to the
United States as a franchise tax except that the whole of
such net earnings, including those for the year ending
December 31, 1918, shall be paid into a surplus fund
until it shall amount to 100 per centum of the subscribed
capital stock of such bank, and that thereafter 10 per
centum of such net earnings shall be paid into the surplus."
The plan for providing a surplus equal to 100% of the subscribed capital
was not a part of the original Act but came as an amendment in March 1913.
At this time the Federal Reserve Danks with the exception of the Federal
Reserve Jank of Dallas, Texas. have a reserve of not less than 100~ built
up out of net earnings.
The last statement as to net
earnin~s
and their
.....
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X-3303
distribution was as follows for the System:
Dividends paid
................. ,. . $ 37,395,205.
Transferred to surplus
218,369' 549.
Franchise tax to Govt.
135,387 ..341.
Under this system of a fixed dividend, the incentive for earning unusually
large profits is largely removed.
The earnings of the Reserve Danks are
largely govern4d by the volume of credit needs of the country and necessarily will vary in accordance with the volume of business.
During the years when the Reserve Janks were handling the governmental
war rtmance activities 1920-1921, the Reserve
Ban~s
$120,000.000; in 1922 they paid about $10,000,000.
paid the Government
The necessity of meeting
all overhead expense of the Federal Reserve System including the expense
of the Federal Reserve E-oard at v·ashington, is a direct obligation of the
Reserve Banks~ as the Government is under no expense for or on account of the
Federal Reserve System or any of its branches.
The surplus which the ranks
accumulate belongs to the Government in case the bank or banks should be
liquidated.
The member banks under the law can under no cirCQmstances receive
more than the return of their capital and six per cent
(6~)
interest on their
investment.
I hope I have made this point clear to you.
The earnings in this in-
stitution to its stockholders can in no event exceed six per cent
(6~).
The
earnings during the years /imerica was actually engaged in the war were very
~eavy
on account of the large volume of Government financing that was cleared
t:.1rough the Reserve System, and in addition thereto, the
profit that
naturally accrued to the system through the large volume of note issues and
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X-3303
12-1/2
rediscounting necessa:cy to care for the increased volume of business
that on account of high prices necessarily required a greater volume
of credit in order to function.
Observations of the past few months as
to the tendency of income would lead one to the conclusion that under
normal conditions the problem of the future will be how to meet the
overhead expe·nses of the system, rather than one of curtailment of net
earnings.
To go into minute detail of the operation of the Federal Reserve
System would take a great deal of time and in the end would no doubt
leave you so confused as to querlt
what is it all about.
I have en-
deavored to give you a clear picture of the fundamental principles and
how they
operate~
1st As to the purpose of the Act
2nd As to the membership of banks in the system
3rd The organization of the twelve original banks
4th .As to the. class of paper eligible for rediscount
~
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X- 3303
5th.
6th.
7th.
3th.
9th.
The power of note iSS'lle,
The method of note iss..1e.
The purpose of the reuiscount rate~
The reserves and how the Act changed the legal
requirements.
Distribution of Earnings.
If I might ask your further indulgence without
encroachin~
too largely
upon the time of others, it would be for the purpose of commenting briefly on
the System both from the standpoint of its shortcomings as well as its
ad-
vantages as I have come to understand them during the past few months' experiences.
Many complaints have come to me especially from the Middle Fest with respect to the high interest rates prevailing in rr.any States. The remedy for the
criticism which in rr:any instances is warranted must come from the hands of the
legislators of those states where exor"itant rates are exacted.
Many, if not
allt. states have an established Jn:.ximum legal rate and the custom in the States
is to adopt it as the current rate for loans.
The remedy is- the State; as the
Federal Reserve :Soard has no power to control interest rates charged borrowers
by memaer canks.
The Federal Reserve ::::anks at this time have a uniform discount rate of
percent.
4l
The rate is the sarr.e to all banks in the System. No discrimination
is permitted in the established rate of the Federal Reserve Iank as against any
of its members.
The rate to the borrower, however, in many States, appears to
be very much in excess of the reserve rate and in some instances, the spread
between the Federal Reserve rate and the legal rate is so
wid2t~Bt
it tends to
encourage banks in "borrowing from the Federal Reserve and loaning tc, their customers for the profit that can ce made on the spread.
~,"here
the practice is
followed of loaning money at maximum legal rates as fixed by State lawst naturally
fopows that a low Federal Reserve rate could have no bearing on the ratespaid
by the customer of the bank, as they are governed by the State Law.
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X-3903
It must ba said, howava:t:', in fairness to the banl::e:r that tha pra.ctice
of holding closely to a maximum lega.l sta.te :t:'ate does not appea:r. to be the
genera1 rule as the:t:'e a:t'e Ir.any avidences in Jifferent pa.:rts of the count:t'y
· tha.t money is loa.nad on a. ve:ry small margin, while, in othe:rs the cri ticisms made a.:re justified a.s the sp:read appea.:rs to be too wide.
'lhe :px-inciple undedying the Fede:r.a.l Rese:rve System is not one tha.t
encou.l:"a.ges :profi teex-ing by membax- banks.
'lhe evident intent of Cong:t:"ess
wa.s tha.t the Federal Rasex-ve Bank should be :rega.:rd ed as an institution
to be used in tilnes of emax-gency, o:r. to meet sea.sonal :requirements foxadditional c:radit and finance whenever. local banks we:re unable to do so
out of their own :resoul:"ces.
It is not inconceiva.ble that the custom of following lagal state ra.tes
a.s a. guide for CUr":t'ent rates, may have contributed largely to tha expansion
in ou:r c:redits tha.t developeJ so rapiJly in 1919 and 1920.
intent of the Federal Reserva Boa:rd in increasing the ra.te to
The evident
6%
in Janua.x-y,
1926, wa.s to wa:rn the countx-y of the dangers tha.t would follow if the
axpansion of credit continued, a.s the resex-ves, a.t tha.t time, indicated a.
:ra.the:r ma.terial :reduction in the ra.tio.
But, cont:ra.r.y to all p:recedent
o.r. expecta.tion, tha :reverse of wha.t was hoped fo:r happened, as the inc:rea.se
in the ra.te did not lessen the darr.a.nd for credit.
the ra.te wa.s :ra.ised to
7%
.And a few months la.ter
in fou:r banks of the System;
sane intent and pu:rptOSe in mind.
evidently, with the
H<3re a.ga.in the inc:raase in the rato wa.s
without immadia.te results as the expansion continued fo:r several rr;Onths
following;
and it might not be an un:reasona.ble deduction to infe:r tha.t the
borrowex-s in the country ( the MiJdle Wast and South we:re heavy bo:r:rowe:rs)
we:re not fully informed of the s e:rious expansion tha.t wa.s taking placs
throughout the count:cy and could not be disturbed by any inc:reasa in the
... 15 ...
discount :t"a.tes they we:re and had ba;;;n
X-3903
pa.yir~g.
tha r;.aximum state :rate which
could not have the effect of a.cting as a nota of warning as the :ra.te was not
unUS1J91.
It did, howeve:t", se:r:va a.s a. wa:r.ning to the bankers of tru count.r.y.
They were man of expa:t"ienc3 who }::new that this g:raat increase in the Fade:r.a.l
Rasa:t"Ve :ra.te haJ for its pu:rposa but ona objsct a.nd tba.t wa.s! to, in some
manna:r., effect a. slowing down in the demand for c:r.edit.
This warning should
have been heeded, and in a11 probability, was to some extent;
but in ma.cy
instances the natu-ral prudence a.nd caution that was to ba expected from
the conservative banking class was ei the:r submar ged in tha ir J asi:re for
profits;
or the situation ha.d gone beyond their. control.
'Ihe :reco:rd shows that the Fede:ral Rese:rve System wa.s q_uite gene:r.a.lly
used by the member. banks for. raJ iscounting paper. aft;;;:r. Amar.ica ente:r.od
the wa.r anj la.te:r. on m.:lmbe:r. b3nks d iscount...;d very ext...;nsively for non-member
banks.
In the MississipJ?i Valley, whe:re production is heavy .;md the ma:rket-
ing of fa:r.m commodities, including liv.; stock, assumes la:l:'ge proportions, tha:ra
is a g:r.eat mcessity for heavy financing throughout scasona.ble lJO:rtions of
the yea.:r.
This is asp;:;cially true wha:re co-op2:r.a.tive ma.:rketing ha.s developed
to the point where it is handling th.::: larger portion of fa,r.m r)roducts of that
'Ihe MiJdle West section wa.s a. heavy borrower throughout the years of
a.rea.
1919 and 1920 which at its h~ight bacame very amba:r.:rassing to some m::lmbars of
the Federal
Ras~rve
System.
The .1·ecords of membo:rship disclose the fa.ct tha.t
not over one-thi:rd of the banks in the Mississippi Valley wa:re
~embers
of the
'
Federal Rasarve System a.nd that many of thosa tha.t were members of the Fede:ral R..:sa:rve System wa:r0 not discounting any papGr, consaq_uantly, vv.a:re giving
no extra service to the community beyond thei:r own resources.
Tha Savanth District, vvhich is
Sd"dd
by tha Chica.go Fadc:r.a.l Rdse:r.ve
Bank, showed that on December 30th, 1920_ tha.t bank ha.d a. rr.amb3rship of 1421
banks in th0 dis t:rict;
358 of which w2.re state banks and 1063 w-2-ra rational
... 16 ba.nks.
'llw:re may hava baan soma slight
r~co:r.ds
date, but the
X-3903
inc.r~a.se
in tho membc:J:"Ship at this
will show that sinc3 th;; 1923 .Amenda'l.nt to tha Act
th.:;r3 a.:ra 3074 ;:ligibl3 banks in th.; S.:;v.mth Dist:rict.
T.ha high point fo:r.
loans in this district was r .;achad in Octo bar, 1920, and on tba t da.ta th3ra
was a total of 813 banks bo:r:rowing and locat.;d in tha following statesof
Illinois - 175;
th.J Dist:rict;
and Wisconsin - 64;
Indiana. - 103;
Iowa. - 369;
Michigan - 104;
thus w0 hav:: at th.:: tima of .::ma:r.gancy only 813 out of
a.pp:r.oxirr:ataly a total of 2000 aligibla banks in thJ d ist:r.ict that
war~
.:;n-
d aavo:ring to be of s e:rvice to thJ d ist:rict at a. tirr:a of rn tional amc:rgancy
This lack of mamb"'rship cont:r.ibut6d g:r.aat1y to
such as p:r .::vail ad in 1920.
tha amba.:r:ra.ssm.Jnt of tha discounting banks and cu'"tailJd n:r.y rr.a.taria.lly the
efforts of tha RJs;;rve 'Ba.nlt to s.:rve th_; distr-ict.
the country banks to
b~coma
T.h:; disinclination of
rr.o;;mba:rs of tha syst::;m work.Jd a. ha:rdship on such
banks a.s a.ttempt ad to serve th.: country in that th..3Y wa:r.c
count o.l' borrow to such an ;;xtant tbat
axtand.Jd :md
dang~t'ous.
th~i:r.
oblig~d
condition soon
to :r3dis-
b~camc ova:~:"-
T.h.;;; pX'a.ctic-.:l of country banks functioning through
cox-raspond .3nt city banks has g:rown .;;>no:rmously and it is not unusual fo:t:'
city banks to a.ct a.s co:r:respond.:.mt foX' hund:r<::ds of individual countX""y banks.
And in Q;t!dex- to r;;tain tha country bank accounts, th3 city banks pl..::dgc
thems ~lv 3S to como to the financial a.id of the country banks in t irr.0 s of
naad, a.nd, in order to do so., oft:m find it n3C3SSa.l'y to bor:row ve:r.y h3avily
from th 3 Federal R3serva Banks in .;~rr:ounts wholly out of all proportion to
their ca.pital and su:rplus.
Under the; old system of national banking, banks wor.: p3 nr.i ttcd to
:rod is count to th~ amount of thd r capital stock and su:Y"plus;
under p:r..>sent
b<>nks
hav0 fiXJd th0 ba.sic lin.:: for borrowing rr..;mb;;;:t"
cond 1·t·10ns th-' r·s~-y-,
~
~
v ~
'"'
v
.
.•
X-3903
- 17 banks at
consid~rab1y
bayonJ th:.;t point.
To
illustrat~,
taka a. hypothatical
case - Tb.a basic lin a in r;:os t cases would be ~ t irre s its cspi tal, o:r $1,500,000
foT" a. bank with a capitalization of six hunJ:rad thousanj Jolla.rs.
daposi ts total seven million
J
olla.rs.
( $7,000 ,000).
Its indiviJual
This bank borrowad from
the Fedaral R.;serve Bank of its district Fou,. and One-half Million DolJ.a:rs
($4,500,000), or seven tirr.es its capital.
Comrwn sensa anJ oT"dina.:ry business
prudence would cause any r.::an in this audience to inquire as to how the Directo:r-s in a bank of that kind could justify this cor.a it ion-
While the il-
lust:ration is not an actual pictu,.e of any bank, it is typical f:r-om tha standpoint of Ras.s:rve
a.ru
Capital to its :rediscount liabilitias.
'iTo illustrate
fuTther, suppose this bank had, app:roximataly, two hundred country banks as
clients.
Woula it not ha.ve baen the bdte:r pa.:rt of wisdom for those two
hundred country banks to have joined the System and placed thair institutions
in a ]!OSition to make thei:r loans direct with the F;;;de:ra1 Reserve Bank and by
so Joing avoia the aJJitional chcn:-ge to thd corresponJant bank anJ allowed
this cha.rg;;; to acc:ru.a to the bcnefi t of bor:rowe:r, which in itself wouU ha:va
been
D
substantial sSJving, when conside:r0d in the light of the laT'ge volume
of ,.eJiscounting n-;;ce;;;sa:ry in this count:ryi
The 1 iabili ty to the Federal
Reserv<> Bank woula have b--:;an no greate:r- tha.n it was to the city bank, anJ tha
local bank woulJ have been in a much better position to s6rva its customers
a.ccording to thdr" n.;03s anJ tha needs of the comrruni ty.
The incentive of the bor:t·owcr should be to un,Jert9ka to p,.ocu:re his
necessa.ry loans at th.3 ver:y lowest rat-:; ano his bank should be willing to
offer every facility that wouU amble him to Jo so.
It should be the pur-
pose of the local bank to :reach as d i:ractly and ch;:;aply as possible the
X-3903
- lS -
founta.in-hc::a.d of its .Jii•i.l:l'.'g;;;ncy r.JsourcJs and this can ba don-.> through a
m.;;mb.:;:rship in th8 F..;d0ral Rasorv:.; Syst.::rr..
Th.;;ra ar-3• as I viaw it, rr.any obsta.cl"'s to ov3:r.coru bafore tha mzmbc:r.ship in th.;; eystoru will nach th..; point that will .:Jnabl<:J .:;vary comrruni ty to
gat tha most di:r.Jct b.Jn.;;fit.
Som.J non-m;.;rr:b a r banks , in r:.any ins tanca s , hav a
not r-aa.chad tha point whaN thay can s_;.;; any
aJvantag~
in b.Jing a. m.Jn:b;;r.
Otha:rs a.re not m..m~b..;rs b..;causa of :r.aasons that apply only to th.;; n2.tarial
sid3 of businass - profits.
It is pa.r.f..;ctly natural that any banking
institution should b..; 3liw to the nacassity of t:a:rning dividar,ds on·its
capital, but thJ n.;;c..;ssi ty for giving sa:rvic.; and
is a.
pN:r~quisitz
to _,amings.
.tJrOt~
ction to its pa.trons
W.c..::m th..; custon.:;...rs of a bank hav.:; knowl..;dga
that thai:t' d.3pOSltS ar.; J?rot.;;ct-.;d by a. r.:;sc.;r.v.:; that cannot b.:; dissipa.t:::d,
it b.:;com.Js Lor..; of an ass.:>t to ti.B bank than coulJ po:>sibly accru.J to it
from
2%
on th.:; sr:.a11 r.;sarva now rJ~uirJd.
Tha most SJ:r.ious drawback to tha Fad.:;:r.al R.;s:O.rva Systdr.:. at this
rr.omant is thJ a.ttitud..:: of 1.1any of ou:r p..;opl..; towa.rd
th~
FJd.Jral
R~s;;;:rva
It is r;:;gnttabla that thJ busin..;ss
and fa:r.ming inLN<>ts and borrowing public g,m.;;rally
into a. rr.or.;
intirrat~
confidGnc~
ha.v~
not
b.-~n
takan
and rwr..; fully info:rrr.-.;d on th.;; obj.;cts, pur-
posas a.nd int.mt of this systarr., in ordar tha.t th:;y n.it?P-t
stand its functions and comp:r.:;h.;;nd its 3fLctivan-=lss..
int~llig3ntly
undar-
Tha ma.Jority of lat-
tyrs I :r.'-3C3iv.,; indicat::: v;;:r.y cba.:rly that th0 F-:::d":ral R.Js.;;.rva Systam in its
policiJS and functions is not understood and rr.ony p..;opl_;; a.:r.a wholly uninfo:r.m~d
o:r.
wisinfo~rud
as to its obj...;cts.
If
w.;; JV..:rG
d aa1 ing with a.n or-
dina.ry pi.;;;ca of legislation o:r. sorr.G aca.derr.ic problarr. th-=l mattar would :right
i tsalf b0causa it ·.vould hava thd support of th3 :;.,,t..;r;:)stad cla.ssas who
would
5 .;_,
that it w9 s p:rop;;:rly pr..;sJntad, but h.;;:r.; 1Va havd a corporation -
I
- 19
semi-public in its na.tu:r.e (by
l'd::3SOn of
'·
~
-
-..,-
X-3903
goV3:mrr..:mtal sup..>l'Vision).
It
is p:r.obably thB most pow~-"ful and a.t tha sam.:: tima, tha most far-r.;Ja.ching
in its function of any system that tha wo:rU ha.s av>.:lr known, and, in a.
word, it is lea.st unual'stood.
I, p.;; :rsonally, can lay no cl a.im to any
gl'aat amount of sup<:3:rior knowlaJga of tha Systam but it can ba undarstood
and should ba undal'stood by all tb.p·. .f&O.i.Jl~ th.rougb. tho bJst of info:rn:a.tion tha.t
can b.;; ha.d a.s w~ll a.s tha wiJ;;st .;list:ribution of sm:n!l.
I hav.; no thought of
going into a Jiscussion ovul' th.; charga so oftun rr.a ...L) tha.t thJ F.;d.;:ral
R.;sJMT3 BoaN ha.d ar-bitrarily ol'd-.n•Jd d.:Jflation.
I
JJ~m
it my outy,
howJVal', to l..>aV3 with you thJ information I ha.va on th.; subj.Jct Which I
obta.in.;J la:r.g.;ly from th;;;; rJcor;:is of thJ R.;s.3l'V~ Boa.:r.:i a.n-.~ without going
into JJta.ils, I will say tha.t I finJ no r.;co.,.cl in th.; official minutJS
' f the Boa.rd V\h::;:rJ an o:rdar was pl'omulga.t.Jd or a.ctad upon in aey zr.ann.:;r.
Boa.:rd in
1920 that
no action of any kin..l having for its obj~ct a. J..3Irl8nd
for liqui\Ja.tion, wa.s
<JV~r
takJn.
Th-> Conf~l'Jnco of May 18, 1920) which n;a.ey p~opl.: claimwa.s callud
fol' tha pu:rp0:>3 of darr.ano ing liquiCJa.tion, was onJ of th.::
a.:r-3 h,;:lJ Ja.ch y::.a:r in a.cco:rd anco with th..; p:rovisions of
confG:r.Jr:c~s
th~ Resarv~
v.hich
Act,
a.nd, in o:rder. tha.t you might ha.v.:; th..; full t0xt of thJ Conf .3:r.mc.J a.t first
hand a.nd b3
a.bl~
a.bl~
to study it at you:r L;isu:r..;, I ha:t.TJ b:rougpt
copy with m.::; anj sam.; can b.: ha;J a.t th.:.; S.;cr.3ta:cy's
It would b..:
w~ll
JV.Jry
ava.il-
tabl~.
to k..;ap always in mind th.; thought that th.;
F.-dara~
R.;;sa:rva M.Jr,;b.:;:rs arJ only h'll1Il8n and subj.3ct to human liu,itations, .;xp.:;ri.3nc.J
p:rov..;:s
th~t
humanity is
pron~
to
~r:r.
T.h.3r..;: is no ;,ioubt but wha.t th{l
.. 2G-
Fade:ral Reserve Boa.rd rua.de mistakesj
mistakes;
'·.
X-3903
tha Federal Raserv.-3 Banks ha:ve rna.de
the bankers of the country n>a.ka mistakes;
mistakes and fa.:rmex-s a.ra not imnuna from mistakes.
'businass man make
Uo one who ha.d to do
with tha eventful times and conditions ca.n cla.im a.bsolute imr...:unity f:t"om
blame ..
Wha.t the attitude of the individual Reserve Banks was dUt"ing those
avantful days is unknown to many..
Wha.t the Meno'bar Bank dai11.9nded from its
custon:Brs, I ha.va no way of knowing.
Wha.t the co:r.:respondant city bank
demanded of tha local count:t"y bank will proba.bly n.;vax- be rna.de public.
Wha.t the country bank told its customd:r. can only be irr.a.gined ..
sta.tus of tha borrowax- wa.s a.nd
his loan ws.s ess.:Jntial or non-essential,
But, in the cau:rs;; of tirr.e the histo.ry of our
he alona mutit 'ba the judge.
a.ge will be :t"ecorded.
~Vhethar
Wha.t the
To a. g:raa.t extant it will be a x-epeti tion of the
experiences of war pariods tha.t our countx-y has pa.:.:>;;ed throu€9:1 since its
existence as a. na.tion.
Wa ha:ve bean told of the experiences of the
Itevolutiona.x-y period anu the disa.l:itrous coma tions tha.t followi:ld the war.
The history of the
w~r
of 1Sl2 r8cords tha san2 identical axpariance and
the sama a.ftar-wa.t- disa.strous 8ff.;;cts.
In 1837 the a.gi tat ion and subsequent
lagisla.tion which diso:rge.nized the United Stat.;;s B9nk brought 9bout a. na.tiona.l
ca.lamity.
Following the Civil War we had the usual p<>riod of contra.ction and the
raco:rd of our own timz will show tha.t the ages ha.o not b..; an a.bla to taa.ch the
.American :people how to profit by ex:pari.mca ~nd that they hav a not corr.o to an
a.pp:t"ecia.tion of tha disa.star they would ancountc:r in tha post-war ya9.:r.s of
the World Wa.:r a.nd which are nop known to have 'bean tha :rr.oat disastl'ous that
l
Arr.crica. ha.s av:.r .3xpariencod.
•
- 21 ...
x..,.3903
'!hat soma thing out of tha o ~J ina.t'y must hav o aJ J ad inc,mt i v 3 to
th:.> deflation in co:r.JIT.oJity pricas in 1920 s.;_;rr;s r0asonabl3 to bdL;v.;.
P-:1~sonally, I ha.va haJ rr.any men of unquastiona.bl.3 int..;gl'i ty as sura. rr..; tha.t
arbi t:ra.:cy JJrr.and s war a n:;ad a fo:r 1 iquida.tion and that liqui,Ja.tion to tham
mJant bank:ruptcy.
I hopa the.t thosJ who hav;;;J haJ such an .:)xpa:rien o;; will
sp...;ak up and tell how and by whom an.:i unJar. what circumstances, th-=r were
:raqui:rad to liquida.ta in o:roa:r tha.t full l"3Sponsibility fo:r any 1.mjust
,;afla.tion could ba cJstablish.:;d.
Nothing can .con::a from a.ny
fu~th0:r
a.gi ta.tion
on th-3 subj-Jct ...;xcept es it se:rv.Js as th-:3 rL.:ans of ana.bling us to cr-::a.ta such
safc:-gua.t'Js a.s will obvia.ta anJ .J:.l:Y:"3Vant such ,,isa.st:rous rasults.
My sta.tamant as to wha.t wa.s said anJ who said it and Vvhan and whare,
will always b.: a. subject fo:r discussion without a. solution as to who was
a.t fault unl.:>ss those who ha:J such expc:rianca will speak up and tall wha.t
happened ..
The Fad a:ral Rasa~v8 System is racognizad as an a stablished
institution and its valu.;; to th.;; count:r.y in tiines of 8ID~.rgancy and financial
n~~d
is acknowled gad aven by its .;nami as.
That i t is the last wo:rd in
finance a.nd c:rcd i t and that i t has functioned affici.:mtly in .,,v..;:ry instance
is not ou:r co;:ltention.
Ma.ny suggestions ara offer<:ld f .rom time to tim.:l and
many ar:::andll:dnts have been made by Cong:rass in o:rde:r to incT'ease the
efficiency of tha System to the bor:rowing public.
It is antirely probable
that a,)Jitional chang<ils will be made in the Systam fX'orn time to time and th~se
will be lax-gely ba.s.Jd upon tha knowlaoge we have .sa.inad f:rom ou:r past ..3xpe:riances.
To on.;; who has been privileged to obsex-ve th.; op;;;:rations of the
J
•
••
X-3903
- 22 -
F~deral
Rasarvs Systmr. in }lra.ctics
an~
cor;..i:,a.r;; it with tha financial
rnachina:r:-y of oth.J:r nations, th,;.r.; corr..::s the thought that tha rr.ind tha.t conCciv .:;J th"' .iJaa. wa.s that of a. genius.
the World War which
ha.s
.~var
It not only has stood tha t.ast of
involvaJ th..; rr.ost sav.:3r0 cr.:.:dit stx-a.in tha.t hist~ry
known, but also brought our count:ry to a financial position fa.r
a.bova that of tha oth..:r nations ;mga.gJd ir.
I hold that th-:l first
~ssar.tial
th~
to tha
cor.~.flict.
rr.a.int0nanc;:~
of a. successful
CJ'ddi t and cu.rr.:3ncy systam is a. loyalty of its r::..::rr.bars that will corar.and
th.J confiJenca of tha
1).301)1~
with vvhom thay ;JJa.l.
Tha F.:ldo:ral ruSJrVe Boa.rJ a.t W9Shington and tha Dirdctors of tha
diffJNnt FJdJ.ral R;;;sarvu Banks Jo not J .;al
J
ir.;ctly with tha .i.Juulic, con-
sec...uantly, ha.v J nothing but in-:. ir..3ct conta.ct an..: s.Jcond hanJ info.rrna.tion
This is unfortunate in ona
in tha.t it \JO.JS not giv.:J thJ F.JJ.:;ral·
Ra~orv.;
.T.'.JS_t.~act
Boa:r.:i ox- tha Dir.:;ctors of tha
F..;;;l3ral R.;s.;rv.:> :B9nks tha p.;:rsonal contact with .i.'..30lJL3 of th3 count:cy tha.t
i;) nac0S;;,a.:t•y to a. tho.rough unJ3rstanJing a.n.., con intirnaL knowl.Joge of
conJitions 9.t fix-st hand.
Tha inability or n3gbct of thJ
M~r•.b.;r
Bank
to mak;;; claa.:r. to iti> customJrs on r;;vc;x-y oc...:a.s1on th..J r..3asons fo.r. th:.; bank 1 s
ina.bility to r;~J"t ra;.uosts fox- cr.:.Jdit ha.s crca.t;.;d a. situa.tion tha.t will bJ
y.:.la.rs in th..; unc.oing.
In orJ.:r tha.t this sta.t;;n..;nt r•.ii#lt not be r,,isint.J:rprat.:Jd or tha.t the
impression rnigpt go fo.rth that it was a ,t;.;;rsonal
f~.;;ling
::m.l r.. ora o.r lass
praju::..icial, I want to c~uote you v;.;;x-ba.tim what a. Vi:J.:r.y l-'x-ominclnt bank-:Jr of
Chica.go ha.s saiJ on thi;;> subjdct in a. SlJc.:lCh J>3liverao 3t Atlantic City,
in Sa.~ttamber,
Auocia.tion:
1923, to tha
t;~.SS.;;Jn.blaJ .;;.,;lega.t _,s of the .Ar.a.rica.n J3anka.rs'
..
.
riA
- 23 -
X-3903
•
tr.~.os.;;
thJ conJitions of
irrmaasu,..able
.::ne:pg;;d in :.1.g:ric:ultur-: h
all of u::;
3t1;J
ar.;;
to soma 3Xtent r3sponsibla,
b;;ca.use in soir.a ·:ray r.:ost of us hava
fa.:r.ma:rs•
f~eling
3lr.-.ost
cont:r.ibut,~J
to the
tha.t he:; is not so r::uch tha victirr. of thJ
ci:rcurr,s ts.ncas of his own inJust:ry, as of tho machinations
al~r::.ants
of a.ll
11
As bank..;;:r.s,
to blame
we;;
of businass, fina.nCiJ and gov-:l;rnr;;;;:nt.
cont:ributaJ to this f a~ling vvhan w:;; sought·
ClUr .;, a:.anJ upon th<J fa:rrrG:r fo.:r. lJaym,mt on tha
Rasa:r.va Boa:rJ.
Ou:r cowa.:rJly a.ction in fa.iling to t'-"li ou:r
fal"r.. a:r f:riands tha· t:ruth, which
W8S
tha.t
than that wa wo.ra b-;;ing rc.aja to ..:o so :,y
a.gzncy, is b.:;a:r.ing
of us
3.
abun-.~::mt
'.'\IJ rD ...
sor..:.~
lo:;m:;;:J tOO
&ov;;:rnr;.::mt
f:ru.it today, .sn...•.;.:;;: nav.:; ah;:;,a.d
t:r;;r.: ..m.ious ta.;;;k to ccl":rsct th.;; false ir•. J:--r;.;saion fo:r.
which we ara
r.:1sponsibL~. 11
of its rr.aLb.Jrs, it will b..: .;ifficu:Lt, in;.;aed, to hoJ?:: for .s. i·.;;rrrcrunt continuance of its succass.
Its efficiency will
in ·which tha banks a.s wsll a.s tha
r:1any as tha institution in
.Arr~rica
a.L~ays Japan-.~
.~:·UJlic sup,~;>ort
it.
u 1_.on th:;;: u.mr..,;::r.
It is racognizJd by
thJt is to act st all tin:as
of finance anJ credit anj its .Jfficiancy in sar·ving tha
p..::o:pL~
:3S
a bs.rorc0ta:r.
will aLva.ys
.:Jepand upcn the rrEnru:r. in which all of th.:l a.g:ricul turDl 9n-i businass inta:r.>sts
.~
-··
...
l
\:
--24of tha country
a'~"a
,II'
J_
wa.'~"nings.
In conclusion, I, pax-sonally, can see nothing in the prasent
a:Ppea.'~'S
'"
~.
X-3903
willing to b.;; guioad by its
si tua.tion tha.t in any way appears
... .
alarming~
C'~'adi t
The country as a. Vlhole
to be in an easier si tua.tion financially than a yaa.r a.go.
)g~icul ture,
:recova~y
on the whola, has rr.ade substantial
and while the:re are many :rea.sons
fo~
p:rog~ess
toward
the optimistic feeling over
the pax-tial retul'n of a. mol'e prosperous condition, the situation is not
one to wa.r:rant tha farmer in indulging in any ext:ra.o:rJ ina.:r.y dXtra.va.gance.
Tha.t
th~r.>
ha.s baen a. la.:rge arr.ount of liquiJation on the pa.rt of the fa.:rrr.or
is conceded;
howevex-;
this ha.s not
be~n
dua entiNly to p:rofits on cu:rNnt
opera.tions, a.s the rr.o:r.tga.ge indebtedness on fa:rr.:s has baen matel'ia.lly increased Ju:ring the pr-ocess of liquiJa.tion that ha.s been going on, and this
gave color to the thought that fa.rr..ars have to some axtant :reduced th<i1
loans n·.aJe for cur-rent obliga.tions by incraa.sing r..o-rtga.ge indebtedness on
fa.r-ms which is litex-a.lly trne in many casas, a.nd until tha.t p:roblerr. has been
met and pe:rma.nently a.djusted • agricultur-e Ci:lnnot
post-wa.:r r-ea.djustmants-
b~
said to hava rret a.ll
@FedFRASER