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W. P. 0. HARDING. GOVERNOR
PAUL M. WARBURG, Vice Governor
FREDERIC A. DELANO
ADOLPH C. HILLER
C H A g gj^ ?. HAMLIN
EX-OFFICIO MEMBERS
WILLIAM 0. HcADOO
SECRETARY O F THE TREASURY
CHAIRM AN
JOHN SKELTON WILLIAMS
FEDERAL RESERVE B O A R D
COMPTROLLER O F THE CURRENCY
WASHINGTON
H. PARKER WILLIS. SECRETARY
SHERMAN P. ALLEN. ASST.SECRETARY
and fiscal Agent
ADDRESS REPLY TO
FEDERAL RESERVE BOARD
Dear Sir:The Federal Reserve Board has bad under consider
ation the payment of dividends by Federal Reserve banks.
In
the future when it is the intention t d ’Sabmit to the Board of
Directors of your bank the quest fin
the payment of a divi
dend, the Federal Reserve Board desires tj#vhave you furnish it,
a sufficient length of time prfcbr
submission, with the
following information
1.
Darnings.
3. Current expenses, including post of Federal reserve notes
used;
Depreciation in vault and equipment;
Ket earnings;
.
Per cent and amount if dividend suggested;
Balance
the surplus and profit and loss accounts at the
time of rendering statement, and estimated surplus
after allowing for payment of dividend.
3. Unpaid indebtedness' of closed banks to Federal Reserve
• bank:
(a) How secured, .
(b) Estimated losses.
4, Indebtedness1 to Federal Reserve bank of^ member banks
considered to be in ever-extended or unsafe condition,
giving names of banks, indebtedness o & each, and se
curity, if any. .
For your information it may be stated that the Boa^rd
w
•
\
hflds that a Federal Reserve bank should, p r i w - t o the declara-
•. p
t i t o o f a dividend, make provision for the following:-
«
500
■2-
d. Provide far its entire organization expense;
2. Provide for the cost of Federal Reserve notes used;
3* Provide for depreciation in furniture, vaults and '
equipment, and '.-'here real estate is owned, pro
vide a substantial amount to reduce the book
value;
4. Provide an amount equal to its estimated losses on
obligations of closed institutions;
5. Frovide an amount equal to hotes or obligation's bear
ing the endorsement of failed banks where such
notes have been past' due fsr three months or more;
6. Set aside an amount equal to at least 10^«tf its not
earnings during the first fer years to provide -fior
unexpected expenses and losses.
Attention >s directed' t4 tne f.-.ct
dividends ..re
cu.milative and constitute a first claift upon che earniags -of the
banks.
Deferred dividends should be p>.-id'when the earnings of
the bank permit.
It ia regarded as better policy to show a
gradually increasing dividend than to establish a high rate -.vith
the possibility that ic may be reduced.
The policy of declaring
full dividends to a specified date is more highly regarded than
*r
that of declaring dividends at a lower rate for a longer period.
Very respectfully,
Governor
♦
840
*
502-
FEDERAL RESERVE BOARD
WASHINGTON:January 13, 1916*
Hon. Paul M. Warburg,
Foderal Reserve Board.
Dear Mr. Warburg :
A considerable volume of trade acceptances is coming
forward from-the Orient to the N o t York market, d r a m by sellers
of goods in the Orient upon m i l k n o m importing and manufactur
ing concerns in the United States.
These are purchased in the
Orient by the branches pf the Hong Kong and Shanghai Banking Cor
poration, the Yokohama Spocio Bank, the Chartered Bank of India,
Australia and China, and othor similar banks and bankers. The
branches of theso banks in N ott York City receive the bills from
the Orient, have then acccptod and thon sell them in the opon
market -frith their endorsement. Such bills sell at a rate equal
to or approximating closely tho rate for bankers1 acceptances.
Regulation T provides that ’’Before purchasing domestic
bills of exchange, the Federal Reserve iBank must securo statements
concerning the condition and standing of the draper of the paper,
rin^ftif possible, also of the acceptor of the bill, sufficient to
satisfy the bank as to the nature and quality of the paper to be
purchased. ”
In the case of bills of the kind I have described it
•frould be manifestly impossible for us to securo statements of the
draper and Governor Strong and I feci that it Tould be impracticable
for the present, at least, to obtain statements from the acceptors,
since they have no interest in That becomes of the bill. Yot it
seems to us of importance that no should be able to buy such drafts
Then endorsed by responsible banks or bankers ( from v/hom to could
obtain satisfactory statements of conditions )• The establishmentof a steady market at Iot rates for such bills Till greatly facili
tate the making of dollar exchange in the Orient, Till tend to croato
competition for dollar bills among tho bill buyers there, and Till
tend to an appreciation of the groat differentiation in favor of
dollar exchange no.7 existing.
Possibly in tho forthcoming regulation in cases .vhoro such
bills are endorsed by banks or bankers and are sold on their credit,
tho statement required might bo that of the bank or banker. Wo are
anxious, horever, to make progress in the matter promptly and I pm
Triting to inquiro Thothor it jould not bo possible for tho Board to
adyise Federal Resorvo B ^ a k ^ p j s a temporary, modification, of Regular.,
tion T, that tho statcmohTT’rcquirod under paragraph V, in regard to ■
bills endorsed by banks or bankers, might be considered as applying
to the banks or bankers, rather than to tho dravors and acceptors
of bills.
Requesting, that this may have the favorable attention
of the Board.
Respectfully yours,
(Signed)
PIERRE JAY
CHARLES S. HAMLIN. GOVERNOR
FREDERIC A. DELANO. VICE GOVERNOR
PAUL M. WARBURG
W. P. G . HARDING
ADOLPH C. MILLER
Ex-officio Members
WILLIAM 6. MCADOO
SECRETARY OF THE TREASURY
CHAIRMAN
JOHN SKELTON WILLIAMS
FEDERAL RESERVE B O A R D
Co m p tr o lle r o f th e C u r r en c y
H. PARKER WILLIS. SECRETARY
SHERMAN ALLEN. ASST. SECRETARY
A DDRE88 REPLY TO
WASHINGTON
FEDERAL RESERVE BOARD
509January 22,1916.
SIR:
Enclosed please find 50 copies of revised forms Nos. 286b
and 287b for reporting the monthly earnings and expenses of your
bank. No change, has been made in the form of the report for the
earnings except that the reading of the first two captions has
been modified to agree with the reading of the corresponding items
on Form 3^-*
Under the second head should be included, therefore,
the earnings from all open market purchases of trade acceptances,
bankers* domestic acceptances and bankers* foreign trade accept
ances.
No provision has been made for reporting separately
"Commissionspaid".
Such commissions, in accordance with informal
ruling of the Board under date of September 22, 1915* ( See page
3 O9 of the October Bulletin), should be treated as part of the purchase
price or cost of the investment.
Under the head of Current Expenses the following observa
tions would seem pertinent :
1.
Assessments on account of expenses of Federal
Reserve Board should be apportioned to each month
(regardless of the dates when paid) and cumulative
figures of amounts charged since January 1 be shown
in the second column.
2.
The expenses of the several advisory bodies, in- ,
eluding the Federal Advisory Council, the Governors*
and the Federal Reserve Agents’ conferences, should
be segregated, these expenses to include fees, per
diem allowances, travelling and other incidental
expenses.
3*
Items to be apportioned over a period should on
day of payment, be charged to account "Expenses paid
in advance" (BIDE- Form 3 ^)* pro rata amounts to be
transferred to Current Expenses on the last day of
each month and be included, under proper headings,
on monthly report of expenses (Form 287b).
if
-
2-
-509
Under the general head of Organization Expenses
please report, in accordance with informal ruling of
December 10, 1915> ( page 12 of the January BULLETIN),
in short column the cost of Federal reserve notes is
sued by the bank prior to January 1 not offset by cur
rent earnings, and all other organization expenses
shown on Form 3 ^ after closing of books for calendar
year 1915*
The total of these two items (HUNT) should
equal the amount shown at the beginning of the year
against item BEAM on Form jk* Attention is called to
the provisions of the Board’s informal ruling of Decem
ber 10, 1 9 1 5 ^ regarding the methods of amortizing the
cost of Federal reserve notes and other organization
expenses.
5*
A separate account is set up for depreciation of
furniture and equipment. This account is to show amounts
written off in accordance with paragraph 5 of informal
ruling of December 10, 1915•
6.
The amount of item HALL shown at the foot of Form
227b should equal the amount shown against item BATH on
Form 3 *+ as at close of business on the last day of each
month.
Items shown in memorandum on Form 2S6b represent
amounts expended during the month on account of Federal
reserve notes printed and shipped, including expressage,
insurance, etc. ; also amounts paid during the month for
furniture and equipment. As indicated in the heading,
the figures in the second column against items HOLT and
HERD in this memorandum should equal amounts shown against
items BOOT and B0L0 on Form 3 ^+ as at close of business on
the last day of the report month.
Copies of the monthly report of earnings and expenses
should be sent to us on or before the seventh of each month.
Respectfully,
Assistant Secretary.
Enclosure
b'aL'O
511
84tt
Washington, D. C., January 24, 1916,
ANALYSIS OF THE RESERVE CITY SITUATION,
First;
Under Clause (a) of Section 11, of the Federal Reserve
Act, the Federal Reserve Board is authorized and empowered:
"To add to the number of cities classified as
reserve and central reserve cities under exist
ing law in which national banking associations
are subject to the reserve requirements set forth
in Section twenty (should be 19) of this Act; or
to reclassify existing reserve and central reserve
cities or to terminate their designation as such,"
Second:
The Reserve, requirements at the end of thirty-six months
after the Banks were organized - i. e. until November 2, 1918,
will be as follows:
At the end of 36 months from the starting of the banks,
(ice. November 2, 1918) the member banks will have the option
of keeping the following percentages of their demand deposits
in the manner indicated, depending upon their location:
(a)
Membe r
Bank
Located
In
(b)
Required
Minimum
Federal
Reserve
Bank
Vaults
Required
Minimum
In own
Vaults
(e)
(d)
(c)
i
Reserve
Which at
Option of
Member Bank
may be Kept
in Federal
Reserve
Total
Total of
Bank or in
(b) and (c) Reserves
Own Vaults
Central)
Reserve)
Cities )
6$
7$
V
12$
18$
Re se rve)
Cities )
bfo
5%
4'jo
10$
15$
5$
*
”35
O
j^
Q
8$
12$
Country)
Cities )
&Towns )
i
4$
i
!'
511.
Third:
Under Section 19, of trhe Federal Reserve Act, which is
tho Section making provision for the payment of reserves into
the Federal Reserve Banks, the Banks in cities already known
as central reserve cities or hereafter so defined, are required
to pay in their reserve deposits at once, whereas, banks in
reserve cities and non-reserve cities are given three years in
which to transfer their reserves.
Fourth;
There are in the United States at the present time three
central reserve cities and tn-fk-jCMn reserve cities.
Grouping
these cities according to the tweiW Federal Reserve Districts,
the list appears as follows:
List of Central Reserve and Reserve Cities, Grouped by Districts
and According to Population*
DISTRICT Ho. 9 :
DISTRICT No. 1:
(*) Boston
Population
670,585
(*) Minneapolis
St. Paul
Population.
301,408
214,744
DISTRICT No. 2:
(*) New York City
Albany
4,766,883
100,253
DISTRICT No. 3:
(* Philadelphia
1,549,008
DISTRICT No. 4:
(* Cleveland
Pittsburgh
Cincinnati
Columbus
560,663
533,905
364,463
181,548
DISTRICT No. 10.
i Kansas City; Mo.
Kansas City,Kans.
Denver
Omaha
S.Omaha,Nebr.
St.Joseph,Mo.
Oklahoma City
Wichita,Kans.
Pueblo,Colo.
Lincoln,Nebr,
Topeka,Kans.
Muskogee,Okla.
248,381
82,331
213,381
124,096
26,259
77,403
64,205
52,450
44,395
43,973
43,684
25,278
844
DISTRICT No.. 5:
DISTRICT No. 11 :
Baltimoro
558,485
Washington
331,069
!) Richmond
127,628
Charleston,S.C,. 58,883
DISTRICT No. 6: ‘
New Orleans
(*)Atianta
Birmingham
Nashville
Savannah
Chattanooga
San Antonio
(*) Dallas
Houston
Ft. Worth,
Galveston
Waco
96,614
92,104
78,800
73,312
36,981
26,425
DISTRICT No, 12 :
339,075
154,389
132,685
110,364
65,064
44,604
(*) Sa n Fran cisco 416,912
319,198
Los Angeles
237,194
Seattle
207,214
Portland
104,402
Spokane
Salt Lake City 92,777
82,972
Tacoma
DISTRICT No. ,7:
(*) Chicago
2,185,283
Detroit
465,766
373,857
Milwaukee
Indianapolis 233,650
Bes Moines
86,368
Sioux City,la. 47,828
38,494
Dubuque
Cedar Rapids 32,811
DISTRICT No. 8:
(*) St. Louis
Louisville
687,029
223,928
Federal Reserve Cities marked with (*)
Fifth:
In order to study the reserve situation from the standpoint
given under.the law, a list of cities having a population of 100/300
or more, in. each District, is herein shown, also, a list of cities
having 50,000, but less than 100,000.
It will be noticed that there
are fifty cities in the United States having a population of more than
100.000, and fifty-four cities having more than 50,000, but less than
100.000,
For the convenience of the student of this question these
cities are grouped by Federal Reserve Districts.
(See Exhibit 'A )
EXHIBIT
A
846
{
LIST OF CITIES IN UNITED STATES
HAVING A POPULATION OF OVER
ONE HUNDRED THOUSAND
Classified as to Federal Reserve Districts
PJ-R.TR.XCT NO. 1 :
(*)
Boston, Hass.
Providence,R *I .
Worcester > Hass *
New Haven^Conn,
Fall River, Mass.
Lowell, Mass.
Cambridge, Mass,
Bridgeport> Conn.
DISTRICT NO- ? L
670,585
224 ,326
145,986
133,^05
119,295
105,294
104,839
102,054
(*)
Chicago,111
Detroit,Mich.
Milwaukee,Wis.
■ Indianapolis,Ind.
Grand Rapids, Mich.
DISTRICT NO. 8;
(*)
DISTRICT NO. 2:
(*)
New York City
Buffalo, N.Y.
Newark,N.J.
Jersey City,N.J.
Roche ster,N .Y.
Syracuse ,N.Y.,
Paterson, N.J.
Albany,N .Y .
4,766,883
423,715
347,469
267,779
218,149
137,249
125,600
100,253
(*)
687,029
223,928
131,105
Minneapolis,Minn,
St,Paul,Minn.
301,408
214,744
DISTRICT NO. 10;
(*)
1,549,008
129,687
St. Louis, M q »
Louisville, K y .
Memphis,Tenn.
DISTRICT NO. 9:
DISTRICT NO. 3:
(*) . Philadelphia,Pa.
Scranton,Pa.
2 ,185,283
465,776
373,857
233,650
112,571
Kansas City,Me.
Denver, Colo.
Omaha, Nebr.
248,381
213,381
124,096
DISTRICT NO. 11:
DISTRICT NO. 4:
DISTRICT NO. 12:
(*)
Cleveland,Ohio
Pittsburgh,P a .
Cincinnati,Ohio
Columbus,Ohio
Toledo,Ohio
Dayton, Ohio
560,663
533,705
364,463
181,548
168,497
116,577
(*) San Francisco,Cal.
Los Angeles, Cal.
Seattle, Wash.
Portland, Ore.
Oakland, Cal.
Spokane, Wash.
416,912
319,198
237,194
207,214
150,174
104,402
DISTRICT NO. 5:
(*)
Baltimore, M d .
Washington, D.C.
Richmond, Va.
558,485
331,069
127,628
This list totals 50 Cities.
Note:
-DISTRICT NO. 6:
(*)
New Orleans,La,
Atlanta,Ga.
Birmingham, Ala.
Nashville, Tenn.
339,075
154,879
132,685
110,364
Federal Reserve Cities
are marked with (*).
(Exhibit A)
(Sheet No,2 )
LIST OF CITIES IN UNITED STATES
HAVING A POPULATION OF OVER
FIFTY THOUSAND
BUT LESS THAN ONE HUNDRED THOUSAND
Classified as to iFederal Reserve Districts.
DISTRICT NO. 1:
Hartford, Conn,
New Bedford, Mass,
Lynn, Mass.
Springfield, Mass.
Lawrence, Mass.
Manchester, N.H.
Portland, Me.
Holyoke, Mass,
Brockton, Mass,
Pawtucket, R.I,
DISTRICT NO. 6:
98,915
96,652
89,336
88,926
85,892
70,063
58,571
57,730
56,878
51,622
Savannah,G a ,
Jacksonville, F1&Mobile > Ala,
DISTRICT NO. 7:
Des Moines, la,
Peoria, 111.
Ft, Wayne, Ind.
Terre Haute, Ind.
South Bend, Ind.
Springfield, 111.
Saginaw, Mich.
DISTRICT NO. 2:
Yonkers, N.Y.
Troy, N.Y.
Utica, N.Y.
Elizabeth, N.J.
Hoboken, N.J.
Bayonne, N.J.
Passiac, N.J.
79,803
76,813
74,419
73,409
70,324
55,545
54,773
65.C64
57,699
51,521
86,368
66,950
63,933
58,157
53,684
51,677
50,510
DISTRICT NO. 8:
Evansville, Ind.
69,647
DISTRICT NO. 9:
Duluth, Minn.
78,466
DISTRICT NO. 3:
DISTRICT NO. 10:
Trenton,N .J .
Reading, Pa,
Camden, N.J.
Wilkes Barre,Pa,
Harrisburg, Pa.
Johnstown, Pa.
Altoona, Pa.
Allentoivn, Pa,
96,815
96,071
94,538
67,105
64,186
55,484
52,127
51,913
DISTRICT NO. 4:
Youngstown, 0.
Akron, 0.
Erie, Pa.
Covington, Ky.
Canton, 0.
79,066
69,067
66,525
53,270
50,217
Kansas City, Kas.
St. Joseph, He.
Oklahoma City, Okla.
Wichita, Kas.
62,331
77,403
64,205
52,450
DISTRICT NO. 11:
San Antonio, Tex.
(*) Dallas, Tex. •
Houston, Tex.
Ft, Worth, Tex.
96,514
92,104
78,810
73,312
DISTRICT NO. 12:
Salt Lake City, Utah
Tacoma, Wash.
92,777
83,743
DISTRICT HO. 5:
Norfolk, Va.
Charleston, S.C.
67,452
58,833
This list totals 54 Cities
Note:
F e d e r a l R e s e r v e C i t y marked ( * )
84?
848
-
-511-
6-
The question naturally arises, whether this problem
of greater reserves in certain banks than in others should be ap
proached,
(-)
From the standpoint of the population
of the city, on the theory that the banks in
cities of considerable population are more vul
nerable, e. g. liable to a run, than banks in
country districts;
(b)
Based on the theory of the size of the bank,
banks with large deposits being more vulnerable
than banks of smaller deposits; or
5c)
Based on the theory that different reserves
should be kept against different classes of deposits.
For instance, one basis of reserves against individual
deposits, and a higher percentage against bank deposits.
If we proceed on the population theory, we can go ahead
under the Act as it is ; •; or we can even combine the population
theory with that of geographical location, with that <;f distance
and relations of the Federal Reserve Bank as a convenient agency.
If, however, we proceed under proposals (b) or (c), we must ask for
an amendment to the Federal Reserve Act.
It may be said with a
good deal of justice that it is unfair to apply a different rule
of reserves to a small bank in the suburbs of a large city, which
is, to all intents and purposes, a country bank , than applies to
a country bank a few miles further away.
However, this is an in
justice which might be remedied by giving the large city baijks the
right to operate branches in the same city.
If some intelligent solution of this problem is not
found, complaint will certainly be made by banks in central reserve
cities that they are required to maintain reserves on a basis of say
18$ while given no privileges under the Act ( after the three year
511.
- 7 -
period) which do not apply to bank.' in smaller cities.
The-
result is certain to be that pressure will undoubtedly come
to reduce
reserve requirements down to the fifteen per cent
or even to the twelve per cent level.
Already banks in non
reserve cities are asking to have their reserves reduced to
nine per cent,
Seventh:
In order to show the effect on Federal Reserve Banks of
giving Federal Reserve Cities the designation of Central Re
serve Cities as provided in Section 11 of the Act, a table has
been prepared showing the ratio to capital and'available re
serve deposit.-.
This table shows that in New York this ratio
is .• 9 per cent whereas in the three Southern Districts, ex
cluding special Government deposits of $ 5 ,0 0 0 , 0 0 0 each, it
varies from 31,9 to 34,4 per cent,
In order to show what
the effect would be of requiring banks in these Federal Re
serve Cities to carry IS per cent reserves instead of 15 per
cent reserves, all of which should be paid in at once, an
other table has been prepared to show the results of this
designation.
(See Exhibit B & C)
In the case of the Minneapolis District, on account of
the close proximity and great competition
existing between
St, Paul and Minneapolis banks, both of these cities have
been treated as Central Reserve Cities.
850
EXHIBIT
JO
511.
•
STATEMENT OF
CAPITAL and RESERVE DEPOSITS
-alsoPERCENTAGE OF COITAL TO THE CO IIPINED AMOUNTS OF
CAPITAL AND 6 5 # OF RESERVE DFPOSITS
(Figures ao of December 1,1913)
(In thousands of dollars)
Federal
Reserve
Bank of
Paid-in
C?.pital
BOSTON
5,171
NET YORK
1 1 ,0 6 1
Roserve
Deposits
Percent Paid-in capital rPorcentage of capital
plus 6 5 ^ of Re :to sum of Capital and
Rcservo
D o d o s its serve Donosits :65# of Rosorve Deposits
65
1 7 ,7 1 !*
2 2 ,8 8 5
22-2
1 7 1 ,11+1*
111,21*1*
1 2 2 ,3 0 5
9.0
27,252
PHILADELPHIA
5 ,2 7 c
23,72S
15,U23
2 0 ,6 9 3
25-5
CLEVELAND
5 ,9 3 1
2U,U36
15,883
2i; 811*
2 7 .2
RICHMOND
3,35**
(a) 15, ll*9
(b) 10, ll*9
9 ,81*7
6,597
1 3 ,2 0 1
2 5 .1*
9,951
33*7
(a)12,100
2,1*21
ATLANTA
7 ,8 6 5
10,286
(b) 7,100
l*,6l5
7 ,0 3 6
23*5
3 I4A
CHICAGO
6,6i+l
52,51*5
3 U,1 5 U
1*0 , 7 9 5
1 6 .3
ST.LOUIS
2,750
1 2 ,5 0 2
S,i26
1 0 ,9 0 6
2 5 .5
M inneapolis
2 /4 9 7
13,557
8,812
11,309
22*1
KANSAS CITY
3 ,0 3 0
13,692
8 ,9 0 0
11,930
2 5 .4
DALLAS
2 ,7 5 6
(a)ll* ,0 5 3
(b) 9,053
9,135
5,385
11,891
8,61*1
2 3 .2
17,331
1 1 ,2 6 5
1 5 ,2 0 7
25-9
3 1 3 ,2 2 2
17-5
13 a
SAN FRANCISCO 3-,9*2
5U,85U
TOTAL
Nota:
(a)397,!*89-258.363
(b)302,439 2 h o ,6 1 S
3 0 3 ,1*72
(-) I^c 1..o i v j of $j,jGC,CCO of Government Funds,
(b) Exclusive of $5,000,000 of Government Funds t
Division, Reverts & Statistics,
1/25/16.
31*9
EXHIBIT C.
GJ
511
FEDERAL RESERVE DEPOSITS OF NATIONAL BANKS LOCATED IH THE NINE FEDERAL’RESERVE CITIES NAMED, AND ST. PAUL;
■ ALSO ADDITIONAL RESERVE DEPOSITS REQUIRED IN CASE THESE CITIES ARE MADE CENTRAL.RESERVE CITIES.
(Figures in thousands of .dollars taken from-Comptroller's report for November 10, 1915)
Net Amount
on which
■reserve is
coimuted.
BOSTON
*
Reserve
required after
Nov. 16. 1915
Per ct.
Amount
Due from Federal
'Reserve Bank.
Nov. 1C. 1915(a)
Per ct. Amount
313,195
2.95
99,253
4
363,144 '
3.50
12,713
CLEVELAND
88,778.
3.16
RICHMOND
31,34e
ATLANTA
'
Reserve required
if the cities
named were made
Central •Reserve
Cities
Per ct.
Amount
Excess ovsr amount
required after
Nov. 16. 1915.
Amount
Per ct.
Excess
over amount held
on Nov.. 10.1915(a)
Per ct.
Amount
12,528
7
21,924
4.05
12,671
.3
9,396
■4
14,526
7
25,420
3.50
12,707
3
. 10,894
2,801
4
3,551
7
6,214
3.84
3,413
.
3
2, G53
. 3.23
1,027
4
1,274
7
2,229 .
3.77
. ^1,201. .
..'3
955
23,659
4,58
1,084
946
7
1,656
2.42
'572
.3
710
ST. PAUL
'
MINNEAPOLIS
68,749.
82,175
2.52
2,66
1,733
.2,188
4
4
2,750
3,287
7
7
. 4,812
5,752
4.48
4.34
!3,079
3,564
3
3
2,062
2,4.65
KANSAS CITY.
84., 377
3.55
2,994
4
3,375
7
5,906
3.45
2,912
3
2,531
DALLAS .
24,152
3.34
806
4
966
7
1,691
3.66.
835-
3
725
142,084
2.69
3,827
4
5,683
7
9,946
.4.31
6,119
■3
. 4,263
TOTAL •
For nine F. R.
Cities and St.
1,222,161
Paul.
3.14
38,426
4
48,886
7'
85,550
3.86
. 47,124
3
.36,664
PHILADELPHIA
SAN FRANCISCO
(a)
’1/25/16.
.
4 .
As shown by Comptroller's report..
852
W. P. G. HARDING, GOVERNOR
PAUL M. WARBURG, VICE GOVERNOR
FREDERIC A. DELANO
ADOLPH C. MILLER
CHARLES S. HAMLIN
Ex -Offic io Members
WILLIAM G. McADOO
SECRETARY OF THE TREASURY
CHAIRMAN
JOHN SKELTON WILLIAMS
COMPTROLLER OF THE CURRENCY
J
FEDERAL RESERVE B O A R D
H. PARKER WILLIS, SECRETARY
SHERMAN P. ALLEN, ASST. SECRETARY
WASHINGTON
ADDRESS REPLY TO
FEDERAL RESERVE BOARD
A N l/ jli< a ?L < A G E N T
January 2 5 l®l6
SIR:
In a letter dated January 18, 1 9 1 6 , tronsr.itting a memorandum
outlining a plan for handling unfit Federal reserve notes, the Board
stated that the purpose of the plan was to afford Federal reserve
hanks facilities for returning their own unfit Federal reserve notes
nto the nearest suhtreasuries and through them to Washington.11
This statement was not intended to alter the procedure out
lined, in the memorandum which that letter enclosed and which contem
plates that shipments of unfit Federal reserve notes hy Federal re
serve hanks shall he direct to the Treasurer at Washington. The Treas
ury Department, however, has informed the Board that it m i l interpose
no objection to the assistant treasurers extending to Federal reserve
hanks the use of their mechanical facilities in cutting and preparing
notes for shipment. Federal reserve hanks which are located in subtreasury cities may, therefore, arrange with assistant treasurers for
permission to use the mechaiical equipment of the suhtreasuries for
this purpose.
It is suggested that lower halves he shipped first and uppers
on a succeeding day, both shipments being given the same lot number in
order that they may he easily identified. When both sets of halves have
been received and verified...by the Treasurer in Washington he will notify
both the Federal Reserve Agent and the Federal reserve hank, and the
Federal Reserve Agent should immediately direct the Federal Reserve
Board to transfer from his account with the Board to the account of the
Federal reserve hank in the Geld Settlement Fund an amount equivalent to
the value of the Federal reserve notes received hy the Treasurer for re
demption; or, if a Federal Reserve Agent has no such account with the
Federal Reserve Board, he should make the transfer direct to his hank
in order that it may he reimbursed for the notes shipped for redemption.
Because of the fact that the_ Federal. Reserve Board has no account
with the Treasurer of the United States whereby book transfers could he
made, this procedure will obviate the necessity of requiring innumerable
transfers of actual funds from the Agent, or his account with the Board,
to the Treasurer and a retransfer from the Treasurer to the Board for
the account of the hank in the Gold Settlement Fund.
Nothing herein contained,however,should be construed to do away
v/ith the necessity of each Agent's keeping on deposit with the Treasurer
five per cent of the amount of outstanding Federal reserve notes covered
by a deposit with him of gold or lawful money. This amount will he held
like the five per cent redemption fund of the Bank, primarily for the
redemption of notes presented to the Treasurer hy holders other than
the Federal reserve hanks.
Enclosed are blanks of the forms referred to in paragraphs
IV and V of .the procedure for disposing of unfit Federal reserve note
Respectfully,
Governor.
FORM OF POTER OF ATTORNEY CONFERRING AUTHORITY
INDICATED IN PARAGRAPH V OF THE PROCEDURE INVOLVING THE
DISPOSITION OF UNFIT FEDERAL RESERVE NOTES,
516.
KNOT ALL MEN BY THESE PRESENTS,
That I,....................................... , .Federal
Reserve Agent of the Federal Reserve Bank of ............
.......... .......... ...... , have constituted and ap
pointed, and by these presents do constitute and appoint,
the Treasurer of the United States my true and lawful At
torney in fact, for me and in my name and stead, to trans
fer and deliver to the Comptroller of the Currency for de
destruction all unfit Federal reserve notes of the Federal
Reserve Bank of ............................ , which the
said Treasurer of the United States now holds, or may hold
in tho future, for my account or subject to my order, and
generally to do and perform any and every lawful act and
thing necessary to effect such transfer and delivery.
Witness my hand and seal this.................. day of
.................... , A. D. 1916.
Signed, sealed and delivered in
presence of -
(SEAL)
)
)
)
w . P. G. H A R & & S G o ve r n o r
PAUL M. WARBURG, VICE GOVERNOR
KX>OPPICIO M EM BERS
FREDERIC A. DELANO
ADOLPH C. MILLER
CHARLES S. HAMLIN
WILLIAM 0. McADOO
SECRETARY OF THE TREASURY
CHAIRMAN
JOHN SKELTON WILLIAMS
Co m p t r o lle r o f tme Cu r r e n c y
H. PARKER WILLIS. SECRETARY
SHERMAN P. ALLEN, ASST. SECRETARY
FEDERAL RESERVE B O A R D
and
F is c a l a g e n t
ADDRES8 RE PLY TO
W A S H IN G T O N
FEDERAL RESERVE BOARD
January 25, 1916.
Sir:
One of the Federal Reserve Agents has called atten
tion to, and sent in for inspection, a number of Federal Re
serve notes which have been seriously mutilated and marked up
with blue pencil, or other disfiguring marks.
While there is
no law specifically covering this matter, it is generally under
stood that the mutilating, disfiguring or counterfeiting of Fed
eral Reserve notes, because Federal Reserve notes are obligations
of the Government, must be regarded just the same as the mutilating,
disfiguring or counterfeiting of other United States Government
obligations; "greenbacks" for example,
Tho practice of blue penciling notes in counting them or
at other times, is very specifically forbidden in the case of Na
tional bank notes, and it is perhaps a fair inference that it
should not be permitted in the case of Federal Reserve notes, be
cause the loss through the mutilation or disfigurment of Federal
Reserve notes falls upon Federal Reserve banks and ultimately
upon the National banks.
It seems proper therefore, to call the
attention cf the Federal Reserve Banks to the matter and suggest
that they take it up with their member banks.
Yours very truly,
' Governor,
FORM OF RESOLUTION CONFERRING AUTHORITY INDICATED IN
PARAGRAPH IV OF THE PROCEDURE INVOLVING THE DISPOSITION OF UNFI
W l Tvrvr^ a r
TVr?er,T^rF 'KTnTTi'S
At a meeting qi the Board of Directors of the Federal
Reserve Bank of
.
_______ 3 called pursuant to the provisions
of the by-laws of said bank and held on the ____ day of
> .
191^> the following Resolution was offered* seconded and duly adopted:
!,BE IT RESOLVED* That the Treasurer of the United States
be and he hereby is authorised^ empowered and directed to transfer to
the account and hold subject to the order of ^ _______
~j
Federal Reserve Agent of the Federal Reserve Bank of _________ _______ i
all unfit Federa.1 reserve notes of this bank which the said Treasurer
of the United States now holds or may hold in the future for the account
of this bank or subject to its order and to do c:lld perform any and every
lawful act and thing necessary to effect such transfer-"
I hereby certify that the foregoing is a true and correct
copy of a resolution adopted and spread upon the minutes of the Board
of Directors of this bank* held on the date specified*
Cashier or Secretary
Federal Reserve Bank of
1/25/16
857
521.
An Analysis
of the Condition of
National and Other Member Banks
of the
Cleveland District
ooo
0
ooo
The Grouping of the Banks is as Follows;
H CO OO ^ to «X> t>-
1.
2.
3.
4.
S«
6.
7.
Banks with Total Resources ox up to $100,000.
it
it
11
ii
$200,000
" $100,000 to
t>
ii
II
IT
300,000
"
200,000 "
u
it
11
ii
500;000
"
300,000 "
1!
n
u
IT
1,000,000
11 500,000 "
II
l!
(i
IT
10,000,000
" 1,000,000 "
II
II
t!
it
”10,000,000 and Ove r *
2/2/16
S2l
858
Data, taken from
Reports of Condition cf Member Banks
District No. 4 - Nov. 10, 1915.
.
Average Loans and
Discounts per bank
Croup 1.
33,307.54
Group 4.
Croup 0.
Group 3.
83,195.5£
135,198,46
321,407.29
7.40
4.75
6,12
5.30
Officers and Directors
Liability.
Direct
Indirect ■
12.33
20.81
7.40
7.11
Pei4 cent of Eligible
Paper
28.90
25.80
20.14
16.17
.95
1.75
1.50
1.75
Losses to Borrowers
other than Banks
1913 - 1913 - 1914.
Average Total Deposits
per Bank
30,542,04
96,501.45
'
. 173,540.12
872,478.13
Per cent of Denying De
posits to Total Deposits
89.93
80.05
70.77
67.55
Per-cent of Time De
posits to Total Deposits
1C.07
19.95
29.23
32.45
Average Capital, Surplus
and Undivided Profits
per Bank
31,127.57
Per cent of Demand De
posits
Per cent of Time Deposit?
Average Total Resources
per Bank
Per cent of Loans and
discounts
Per cent of Bonds, Se
curities, etc.
Per cent of Eligible
Paper
34,357.37
48,811.13
75,468.05
88.34
335.81
251.65
243.89
9.63
56.25
1C3.9C
117.16
80,303.94
. 153,943.53
239,637.63
390,03.0.36
41.35
53.39
56.41
56.74
3.44
11.73
14.67
1&;27
11.95
14.31
11.36
9.15
859
521
» 3 —
Data, taken from
Reports of Condition of Member Banks
District No. 4 - Nov. 10, 1915.
(Continued)
Group 5.
Average Loans and
Discounts per b3nk
Officers and Directors
Liability
'
Direct
Indirect
Per cent of Eligible
Paper
Losses to Borrov/ors
otnor than Banks
1912 - 1913 - 1914
Average Total Deposits
per Bank
553,9 5C.58
Group 6.
2,956,792.50
Group 7
16,579,547.64
5.26
3.84
5.66
3.56
3.93
2.44
34.81
22.14
23.67
1.83
2.34
.91
680,721.64
4,009,916.89
27,738,738.85
Per cent of Descend De
posits to Total Deposits
66.40
80.18
96.44
Per cent of Time De
posits to Total Deposits
33.60
19.82
3.26
Average Capital, Surplus,
ana Undivided Profits
per Bank
194,200.39
1,052,744.37
5,741,892.93
Per cent of Derand De
posits
232.76
296.95
465.89
Per cent of Time Deposits
117.76
73.39
17.19
Average Total Resources
per Bank
976,841.33
5,583,969.11
35,317,345.37
Per cent of Loans and
Discounts
56.71
52.95
46.25
Per cent of Bonds, Se
curities, etc.
14.80
14.25
17.15
8.40
11.72
10.96
Per cent of Eligible
Paper
Comparative Market Values-of the
Stock of the National Banks in Cleveland,Ohio.
Bank.
1914
1913
Bank of Commerce, N. A.
Central National Bank
Cleveland National Bank
First National Bank
National Commercial Bank
National City Bank
Union National Bank
219
163
1 O65240
164
209
160
90
266
160
208i
160
220
165
030
10
3
I 6i
—•
4
.. —
—26
-
-
-
-
-
-'
ni
5
ooo COO ooo ooo ooc
000
Cap ital
Nov.1914.
2, 0 00, 0 0 0 .
Bank of Commerce N.A.
1 , 000 , 0 0 0 .
Central National Bank
Cleveland National Bank ■ 500,000.
3, 5 CC,000,
First National Bank National Commercial Bank 1 , SCO,0 0 0 .
500,000.
National City Bank
l,6CG,O00.
Union National Bank
Average. . . .
Decrease
Increase
1,36S,536.
209
160
90
266
160
208|
160
179.08
Jan.1916. Increase
•
19
190
185
105
300
160&
205
188
25
15
34
l
4
- 28
190.46
Bank of Commerce, N. .A.
Central National Bank
Cl&veland National Bank
First National Bank
National Commercial Bank
National City Bank
Union National Bank
(* ) Depreciation.
Net Increase. . . . . .
200 , 0 0 0 .*
30,000,*
82,500.*
650,000.
60,000.*
57,5C0.*
80,000.*
240,000.
-
-
-
-
-
-
3i
——
11.38 Net increase
Stockholders * Advantage
1913 - 1914.
Decrease
1914 - 1915.
380,000.*
250,000.
75,000.
850,000.
3,7500
17,500.*
448,000.
1,229,250.
861
_
5-
521.
Total percentage of
Eligible Paper to Loans & Discounts . .
............... 19.97
Real Estate Loans to Loans & D i s c o u n t s .................
Officers
& Directors Direct Liability to Loans ec Dis. , .
Losses to borrowers, other than banks. 1912, 1913, 1914,
to'Loans & Discounts..................
Average per year......................................
Time Deposits to Total Deposits .........................
1.87
5.13
1.82
.507
19.25
Demand Deposits to Total D e p o s i t s ..........................00.75
Overdrafts to Total D e p o s i t s .................................. 04b
Overdrafts to tbssfeu D e p o s i t s ................................. 0595
862
522.
2 I E M 0 R A N D U M
-
nI£ Bank "A" and Bank "B" have dealings with each
other, and Bank '’A11 "receives on deposit" from one of its own
depositors a check or draft drawn on Bank "B" and L.imediately
credits the depositor's account witn the anount, is there any
recognized usage ox custom of hanking which would authorize
Bank "A" to simultaneously dehit the amount to the account of
Bank "B»?«
Answer:
"Yes" in some cases and "No" in others,
depending on the relation of the banks
to each other.
In considering t^is question the relations of one
bank to another iiUbt be taken into account, for the answer will
depend upon the exact airangenent which is a ratter of contract
or agreement Detween the banks and may be broadly differentiated
under thr^e heads,
to wit*
(a)
where Bank "A" is n large bank m a Reserve or
Central Reserve City and Bank "B" a snail bank
which use3 Bank "Art as its reserve depositary,
(b)
^htire Bank "A" is the little bank m the country
and Bank "B" the large bank m the city, sending
checks drawn against it for collection,
(c)
Where Banks "A" and "B" are on terms of equality,
they may be banks in different cities, receiving
each other’s checks either on the basis of re
ciprocal balances, or on the collection basis,
carrying no balances.
522.
Bank "A11
Bank in a
Case (a)
Central
Be serve
or
Bank in
a NonReserve
City
or Town
Reserve City
CASE (a)
Under the usual custom, which is of course subject to exceptions by
agreement in particular c-ase3, Bank "A” receives from its depositors, whether
banks or individuals, checks drawn on Bank ‘'3" which has a reserve account
with it, and gives their depositors imr.v9d.iate credit.
Bank "A” may receive
such checks from some depositors, either bank or individual as the case may
be, at par, in consideration of a satisfactory balance carried wdth it by
such depositor, and in other cases it may deduct a charge sufficient to com
pensate- it for cost of collection and time involved in transit.
X£ the
depositor be a bank, the credit is usually a bookkeeping entry which does
not draw interest or entitle- the depositor bank to draw against it until the
checks have actually been collected.
As every credit must have a simultane
ous corresponding debit, Bank “A” debits daily the stem total of the checks
that it i3 sending to Bank ”E 1[ against an auxiliary account known as the
’’transit account”, which debit in turn receives a corresponding credit after
Bank ”B” has received the checks and has cade remittance to Bank "A" for
them.
If this remittance is in the form of a check on some other bank no
debit is of course made against the account of Bank nB” with Bank ”A”, but
where Bank ”B” advises Bank ”A" that it has credited Bank ’’A ’s” account with
the amount of the checks, Bank ”A” credits the transit account and charges
the amount against Bank nB'sn reserve account.
In effect this is a system
of immediate credit and deferred debit, but as between banks at least really
tantamount to deferred credit and deferred debit since the immediate credit
is not available.
The principle governing thi3 arrangement is that Bank "B"
is carrying with Bank ”An a reserve account against which it has occasion to
draw checks.
Bank “B” desires to know-at all tines the exact amount that
it has with Bank ”An subject to check,
which wouldbe impossible if it per
mitted Bank nA" to charge on receipt items against the account.'
While, however, this is doubtless the predominating custom today, it is
also true {I) that Bank nA” may have, a general agreement with Bank "B” pro
viding for immediate debit of items drawn on the lattor, without getting any
specific permission in any given case*
such checksin soma large banks amount
ing to a considerable percentage of t._
tal, and(2) that Bank ”A ” may in
some cases where it doubts the solvency cr promptness of Bank ”B ” make im
mediate debit writhout getting permission to 4o so.
864
-
Bank "A"
Case (b)
Bank in
a NonReserve
j City
:or Town
;
k
i
|
3
. -
Bank "B"
522-
Bank in a
Central
Reserve
Reserve City
CASE Co) ■
Under the- usual rules, subject to exceptions, Bank "A" when it
receives from its depositors checks drawn on Bank MB" or other banks,
which by special arrangement it collects through Bank "B" gives the de
positor immediate credit and at the same time makes an immediate debit
on its own books against Bank "B".
This operation enables Bank "A" t^
include the sum total cf these items charged against Bank- ''Bn as part
of its lawful reserves.
Bank "B'1 of course does not credit these items
on the account ox Bank "A” with it until these items have actually been
received; and would not make such a credit against telegraphic advice
from Bank "An that it was mailing the items.
Bank 11B"
Bank |;AT1
Case (c}
Bank in
a NonReserve
City
or Town
i
I
L
j
i
Bank in
a NonReserve
City
or Town
CASE (c)
In this case Banks "A" and "B" collect each otners checks and checks
on such other banks as may have been mutually agreed upon, on a reciprocal
basis.
Each bank charges the other with the sum total of the daily re
mittance letters and credits the other subject to final payment, with the
sum total of items received from the other, making the entry upon receipt.
Each account therefore, shows offsetting debits and credits and it fre
quently happens that balances are not large either wayAs balances ac
cumulate one way or the other, they are usually settled by checknof the
debtor bank upon its correspondent in a reserve city.
2/3 /1 6
-
k 522.
"Assuming that it ware the statutory duty of each
Federal Reserve Bank immediately to credit the accounts of
its member tanks with the face value of all checks and drafts
drawn upon depositors of the Federal Reserve Bank which may
be deposited with it by its member banks, could that duty be
performed at all or could it be performed consistently with
sound banking practice unless the Federal Reserve Bank could
simultaneously debit the amounts of such checks and drafts to
the accounts of the banks drawn upon? ’’
Answer: _ "No".
At the present time the common, but not universal
rule of immediate credit and deferred debit results in the case
of large banks with many correspondents carrying vhat is known
as a "float" amounting, in at least one case which had cone to
our attention, to the large total of $1 9 /0 0 0 ,0 0 0 .
That %.?■ tc'say
there are at any one time book credits aggregating that amount
on the books of one bank in excess of the debits which have been
charged by that bank against the individual bank corresponding
with it.
In other words, the banks .in reserve or central re
serve cities, tc a considerable extent, carry these book credits
in excess of the debits actually charged as an asset, under the
title "Due from other banks."
However, this is not quite so
dangerous a procedure from the standpoint of the bank giving
these credits as it would appear in the telling, for the reason
that these credits are simply book credits, which banks are not
permitted to draw against until collections have beer, made and
the offsetting debits charged; and by the same token, interest
is not allowed on these accounts until returns from collections
have been completed.
The real- effect of immediate credit and deferred debit
is to make for the depositing banks a. fictitious showing in re
serve deposits in the hands of the correspondent bank in the
reserve or central reserve city, for 'while the credits are not
available to be drawn against, they are counted as book credits
and hence as reserves.
2 /3 /1 6 .
A GENERAL SCHEME OF CHECK COLLECTION AND CLEARING
UNDER THE FEDERAL RESERVE ACT.
Washington, February 24, 1916.
1*
The Federal Reserve Board may designate every Federal Reserve Bank
to act as a Clearing House for the checks of its District.
2.
A member bank nay send to its own Federal Reserve Bank for deposit
checks drawn on or collectible through other member banks ox the same
District, but not checks drawn on banks of other Districts#
3.
Every member bank may send to the Federal Reserve Bank of any
District for collection and for the credit of its own Federal Reserve
Bank checks drawn on or through member banks of that District.
This
means that a member bank receiving on deposit checks drawn on banks
all over the country,will send to its own Federal Reserve Bank the
checks drawn on banks of that District, claiming immediate .credit
therefor and it will send to other Federal Reserve Banks, for col
lection and credit to the account of the Federal Reserve Bank of
its own District, checks drawn on banks of the District ot which
such Reserve Bank is the head#
In other words every
Member
Bank will make up its checks into twelve envelopes or packages, one
for its own, and one for each of the other eleven Reserve Banks. It
will send to its own Reserve Bank carbon duplicates of letters
transmitting remittances of checks sent for collection and to the
credit of its- Reserve Bank,.
It can claim immediate credit for
items sent to its own Reserve Bank, but only deferred credit for :
items sent for collection to other Reserve Banks,
U.
Under the above arrangement every Federal Reserve Bank will thus
be receiving direct from, say 7^00 banks - bundles of checks drawn
against its members.
Those deposited by its own members are credited
at once to the account of the depositing banks and debited against
the payer bank, while those sent from banks in other Districts are
credited to the exchange account of the Federal Reserve Bank of the
District represented by the sending bank and debited simultaneously
against the payer bank.
5*
A Federal Reserve Bank each night will have on its books amounts
representing the aggregate of the above credited items; all of which
have been charged against its own member banks; it will wire the amounts
of these credits to the various Federal Reserve
Banks and receive
from these same eleven banks advice of the credits they have to its
account.
If it is assumed that each Federal Reserve Bank keens with
every other Federal Reserve Bank an account for exchange purposes
which may run a reasonable credit .or debit either way, it may be
assumed that in most cases the resulting debits and credits by these
daily balances ’will only have to be settled once or twice a week
through the Gold Settlement Fund.
a
6.
It is suggested that while/Federal Reserve Bank
might properly
charge nothing to its own member banks for items sent to it and
drawn against its own members, it should charge member banks of
other Districts a service charge for the expenses of collection and
remitting balances to the Federal Reserve Bank of the District to
which the sending bank belongs, and this service charge on a reason
able cost basis may be charged by the member bank against its customer.
553-
- 3
7»
The above plan gives immediate credit to the bank for all checks
upon banks of its own District., but deferred credit with a service
charge for all checks drawn against banks of other Districts.
The
time of transit however is greatly shortened for the reason that the
forwarding bank sends checks for collection direct to each Federal
Reserve Bank and should get credit as soon as the Federal Reserve
Ba-nk has received the items, charged them against the payer bank and
credited them to the Reserve Bank of the District represented by the
sending bank.
Thus, the First Rational Bank of Columbus, Ohio, sends
Cleveland District checks to Cleveland for deposit and claims immedi
ate credit, at the same time it sends Chicago District checks to
Chicago, St. Louis District checks to St. Louis, etc.
These checks
reaching these Federal Reserve Banks the next day are charged against
the accounts of payer banks and credited to the exchange account of
the Federal Reserve Bank of Cleveland.
Thus the First of Columbus
should be able to claim immediate credit for Cleveland items and, say
one day deferred credit for items drawn on the Chicago and St. Louis
District Banks; the same for items on Atlanta and Richmond Districts,
and proportionately later dating for
8.
more distant Districts.
The greatest advantage of this method is the direct and simple
routing of all items and the consequent reduction of float.
Large
city banks are now required to send checks for collection to some
500
points whereas, under this plan, they would be enabled to send
checks to twelve centers (except of course, local Clearing House items)
and the clearing and collecting would be focussed and concentrated at
those points with a minimum of delay.
,
869
W. P. G. HARDING, GOVERNOR
PAUL m . WARBURG, V ic e Go ve r n o r
FREDERIC A. DELANO
ADOLPH C. MILLER
FT f“ ' i
CHARLES S. HAMLIN
JJL
Ex -Offic io Members
WILLIAM G. McADOO
SECRETARY OF THE TREASURY
C h a ir m a n
JOHN SKELTON WILLIAMS
FEDERAL RESERVE B O A R D
COMPTROLLER OF THE CURRENCY
WASHINGTON
H. PARKER WILLIS, SECRETARY
SHERMAN P. ALLEN, ASST. SECRETARY
and
F is c a l A g en t
AD D R E SS R E PLY TO
FEDERAL. RESERVE BOARD
February 25, 1916-
Sir:
On January 2 5 , 1916, the Federal Reserve Board, at
the request of the Secretary of the Treasury and in accord
ance with the provisions of Section l6 of the Federal Re
serve Act, requested each Federal Reserve Agent to transmit
to the Treasurer of the United States an amount in gold equal
to five per cent of all outstanding Federal reserve notes
which are covered by a deposit of gold or lawful money.
The establishment of a redemption fund by the vari
ous Federal Reserve Agents became necessary because of the
fact that only four of the twelve Federal reserve banks at
that time had outstanding notes covered by commercial paper
and only those four 'were required to maintain any credit
balance in the gold redemption fund.
In those cases when both the agent and the bank
have funds to their credit in the redemption fund, the Trea
surer legally has the right to redeem notes either out of
the account of the Agent or of the bank, but upon request
of the Federal Reserve Board he'made all redemptions,
whether of fit or unfit notes, out of the Agent's account,
delivering tns unfit notes to the Comptroller of the Currency
for destruction and returning the fit ones direct to the
Agent.
This request of the Board m s made partly to insure
similar treatment of all fit notes presented to the Treasurer
for redemption, and partly to aid in retiring Federal reserve
notes by returning them to the Agent rather than to the bank
for fufcther circulation.
In view of the fact, however, that various Federal
Reserve Agents have formally asked the Board that fit notes
be returned to the Bank instead of to the Agent, on the
ground that such Agent has not the facilities for handling
periodic shipments of small amounts of notes, the Board has
now formally requested the Treasurer to redeem all fit notes
out of the redemption fund of the bank, provided such bank
has a credit balance in that fund.
If it has no such balance,
fit notes will be redeemed out of the Agent’s account and'will
be returned to the Agent.
Fit notes redeemed out of the
Bank's account will, of course, be returned to the bank. All
unfit notes, as contemplated by the plan dated January IS, 1 9 1 6 ,
870
- 2
55^*
will be redeemed out of the Agent’s account and, acting
under the power of attorney given to him by such Agent,
the Treasurer will deliver such notes to the Comptroller
of the Currency for destruction.
Any bank which has no money on deposit with the
Treasurer and which desires its fit notes returned to it
rather than to the Agent may make a voluntary deposit for
the purpose of meeting the redemption of those fit notes
which are received by the Treasurer for that purpose.
Respectfully,
Secretary
559.
February 22, 1916.
My dear Governor:
The accompanying letter from Mr. Myron Camp
bell, Cashier of The South Bend National Bank, South
Bend, Indiana, has been referred to this office for an
opinion.
Mr. Campbell asks whether in the opinion of
this office Section 5211 of the Revised Statutes gives
the Comptroller of the Currency power to require National
banks to furnish any information other than that which is
to be published in the newspaper, and whether the Comp
troller may impose the penalty prescribed by Section
5213 of the Revised Statutes for failure to furnish such
information.
The question of what information may be called
for by the Comptroller under the authority of Section
5211 was considered by the Attorney General in an opin
ion dated November 9, 1912.
In this opinion the Attorney
General says "By section 5211, Revised Statutes, the Comp
troller is expressly given - 'power to call for special reports from any partic
ular association whenever in his judgment the same
are necessary in order to have a complete knowledge
of its condition1.
One view of this section is that it limits the
power of the Comptroller to call for reports con
cerning the financial condition of a particular as
sociation only, and that it is not broad enough to
empower him to ask reports regarding general condi
tions which may have a bearing merely upon the ex
pediency of amendments to the existing law. I think
that too narrow a construction of the section, be
cause section 333, Revised Statutes (above quoted)
requires the Comptroller to make an annual report to
Congress at the commencement of its session, showing
among other things, 'any amendment to the laws re
lating to banking by which the system may be improved
and the security of the holders of its notes and other
creditors may be increased', and the power given in
section 5211 to call for special reports is, in my
opinion, broad enough to authorize him to call for any
reports which may be necessary to enable him to de
termine how, in his opinion, the banking system may
"be improved, by new legislation and what legis
lation he should recommend to Congress for that
purpose".
It seems clear, therefor§, that the Comptroller
is not limited to the statement showing the financial
condition of the bank which is published in the newspaper,
but may call for any information which is necessary to
enable him to determine the true condition of the bank.
Section 5213 refers specifically to failure to
furnish information called for in Section 5211.
In the opinion of this office, therefore, the
Comptroller could impose the penalty prescribed for fail
ure to furnish the information called for.
Respectfully,
M. C. ELLIOTT,
Counsel.
Honorable Charles S. Hamlin,
Gove rnor.
March 1, 1916.
My dear Sir:
On February 29 the Federal Reserve Board gave
final consideration to the appeal of certain Connecticut
banks for transfer from District No, 1 to District No. 2,
and it was agreed to transfer Fairfield County, Connecti
cut, to District No. 2, (New York), the remainder of the
territory covered by your petition and appeal to be left
for possible cons ids nition at some future time, when more
experience with the clearing system shall have been had.
I enclose a copy of a pross notice which wa3 approved by
the Board, and states the situation.
Action has been taken with reference to effect
ing the transfer of the banks in Fairfield County, and the
Federal Reserve Banks of Boston and Now York will take the
matter up direct with the institutions which are affected by
the transfer.
Respectfully,
Secretary.
874
562.
STATEMENT FOR THE PRESS.
February 29, 1916.
The Federal Reserve Board today voted to grant the appeal
of certain Connecticut bankers for the transfer of territory
west of the Connecticut River from District No. 1 to District
No. 2, in so far as relates to the banks situated in Fairfield
County,, adjoining New York State.
Action as affecting the
balance of the territory covered by the petition was suspended,
a majority of the Board not being as yet ready to dispose defin
nately of the appeal, pending more complete development of the
clearing system.
/
3 2/16
875
567.
A BILL TO LIMIT THE USE OF THE WORD “FEDERAL".
BE IT ENACTED BY THE SENATE AND HOUSE OF REPRESENTATIVES OF
THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED.
That all hanks, other than Federal reserve hanks, created and organ
ized under an Act ol Congress approved on December 23, 1913, and
known as the Federal Reserve Act, and all firms, partnerships or
corporations doing the business of bankers, brokers, or savings in
stitutions, and all insurance, indemnity and trust companies, are
prohibited from using the word "Federal" as a portion of the name
or title of such bank, corporation, firm or partnership, and any
violation of this prohibition.committed after the first day of
January, 1916, shall subject the party charged therewith to a pen
alty i
y dollars for each day it is permittod or repeated,
PROVIDED, however, that this prohibition shall not apply to corpor
ations organized prior to December 23, 1913, under titles which in- .
elude the word "Federal" or to firms or partnerships doing business
prior to that- date under such titles.
A
3/8/16.
7‘*o
568.
AMENDMENT TO SECTION 22.
BE IT ENACTED BY THE SENATE AND HOUSE OF REPRESENTATIVES
OF THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED.
That that part of Section 22 of the Act approved December 23, 1913,
and known as "The Federal Reserve Act”, which reads as follows:
"Other than the usual salary or director's fees
paid to any officer, director, or employee of a mem
ber bank and other than a reasonable fee paid by
said bank to such officer, director, or employee for
services rendered to such bank, no officer, director,
employee, or attorney of a member bank shall be a
beneficiary of or receive, directly or indirectly, any
fee, commission, gift, or other consideration for or
in connection with any transaction or business of the
bank",
be amended and re-enacted so as to read as follows:
"Other than the usual salary or director's fee
paid to any officer, director, or employee of a mem
ber bank and other than a reasonable fee paid by said
bank to such officer, director, or employee for ser
vices rendered to such bank, no officer, director
employee, or attorney of a member bank shall be-a
beneficiary of or receive, directly or indirectly,
any fee, commission, gift, or other consideration for
or in connection with any transaction or business of
the bank, PROVIDED, HCWEVER, that nothing in this Act
contained shall be construed to prohibit the. payment
of reasonable fees for services rendered by an attorney
to a member bank who is a director of said bank, or
prohibit a director, officer, or employee from receiv
ing the same rats of interest paid to other depositors
for deposits made with such bank, and, PROVIDED, FUR
THER, that notes, drafts, bills oi' exchange or other
evidences of debt executed or endorsed by directors
of a member bank may be discounted with such member
bank on the same terms and conditions as other notes,
drafts, bills of exchange or evidences of debt upon
the affirmative tote of three-fourths the members of
the board of directors of such member bank".
3/8/16.
87?
569.
BE IT ENACTED BY THE SENATE AND HOUSE OF REPRESENTATIVES
OF THE UNITED STATES IN CONGRESS ASSEMBLED, That Paragraph 31
of Section 4, of the Act approved. December 23, 1913, and known
as the Federal Reserve Act he amended and reenacted so as to
read as follows:
’•Class C directors shall be appointed by -the
Federal Reserve Board. They shall have been for at
least two years residents of the district for which
they are appointed, one of whom shall be designated
by said board as chairman of the board of directors
of the Federal reserve bank and as 'Federal reserve
agent,' He shall be a person of tested banking ex
perience; and in addition to his duties as chairman
of the board of, directors of the Federal reserve bank
he shall be required to maintain under regulations to
be established by the Federal Reserve Board a local
office of said board on the premises of the Federal
reserve bank, Re shall make regular reports to the
Federal Reserve Board, and shall act as its official
representative for the performance of the functions
conferred upon it by this Act. He shall receive an
annual compensation to be fixed by the Federal Reserve
Board and paid monthly by the Federal reserve bank to
which he is designated.
Qne-ef-the-direet&rs-ef
61a8s-Gj--whe-sh&ll-be-a~pereen-ef~tested-banking-experieHeey-shall-be-appeiBted-by-the-FedeFal-Re&erve
Beasd-as-deputy-ehairmaH-aBd-depHty-Federal-reserve
ageBt-t9-exeFeise-%h&-pewearS-e£-the-ehaiFKa»-e£-the
beard-aBd-Pederal-Eeserve-ageBt-iH-ease-df-abseBee
©p-dieaMlity-e^-his-prineipal".
3/8/16.
586
MEMORANDUM
—of—
Various
£or
Clearing
Plans
the
and
Collection
of Checks.
Submitted to the
Federal
Reserve
3O 0
Washington, D. C.
March 21,1916*
Board.
880
586
PLA N
N 0 .
1.
Plan of cneck collection and clearing recommended by
a. Comautteu of Federal Reserve Agents CMesers. Martin,
Curtiss and Jay) unaer date of October 13# 1915/ and enu
bodied in a report of the Committee# printed in full m
the Federal Reserve Bulletin for November 1915# Pages 3^9-372*
1*
That as soon as practicable., and under arrangements
w m c h will make clear and restrict its use to the purposes for
which it w&3 establisred# settlements through the gold settle
ment fund snould be made daily*
2
That the Federal Reserve Banks should soon arrange to
undertake the collection of notes and drafts# and of items drawn
or. no^-member ba?k3 upon the most favorable terns which can be
arranged in tie respective districts.
3
That the Comptroller should be asked to endeavor to
arrive at an agreement *vith all State bank supervisors that on
and after a giver date checks m
the mail shall not be counted
2.0 reserve
That through mutual agreements# oach Federal Reserve
Bank should receive checks drawn on members of the collection
system of every other Federal Reserve Bank# deferring credit
for ther a sufficient number of days to ?llow them to reach the
Federal Reserve Bank of the district of origin# plus the number
of days# if any# allowed by such Federal Reserve Bank to reach
586
- a -
the paying tank; and further
That through nutual agreement* any Federal Reserve Bank
r
may receive lor immediate credit che.ck3 drawn on members of the
r
collection system of any other Federal Reserve Bank; and that
whenever it is froth practicable and more direct* member banks in
3uch collection systems may send direct to the Federal Reserve
Bank of the district of origin instead of to their own Federal
«
Reserve Bank.
1
That the^development of inter^distrjet collecting need
not await the'*completion of the intra-djstrict collection systems.
That' in extending the collection system both within
and across district lines uniformity need not prevail but .instead
there should be freedom and flexibility of rules and requirements
in order that each reserve bank may best meet the conditions and
\
needs of its member banks.
"
That each Federal Reserve Bank should retain the right
to change immediate credit points ’to deferred credit'points* to
assess upon members the cost of its collection service* to make
charges against its member banks for using their balances to create
exch?Jige on other districts* and generally to' make such rules and
regulations as will enable it promptly to safeguard its position
2nd protect itself against unsound development.
883
5$6 -a
•P L A N
N 0
2
Plan for Chock Collection Adopted by the Executive
Committee of Governors at a reeting on October 2 3 , 19^5*
submitting,, witn slight alterations a plan previously
adopted by the Transit Managers of the Reserve Banks*
The Fifth Conference of Governors at the morning session,
Saturday, October 23rd, 1915* considering the further development
of the collection systei , "adopted as its recommendation the sub
stance of Vote 12, of the Transit Managers1’ Conference of October
6th and 7th, 1 9 1 5 * as representing substantially its views on this
subject, and laft to the Governors1 Executive Committee the de
velopment of the details of the plan and its submission to the
Federal Reserve Board with power to invite the attendance at any
meetings of such of the transit men of the different banks as the
committee may select.11
In order that you may be advised of the principles adopted
as the basis upon which the plan outlined m
Vote 12, mentioned
above was drafted, I enclose copies of the minutes of the Transit
Managers1 Conference with notations" m
Ink showing such changes as
were made by the Conference of Governors, except that a typewritten
slip is attached giving the vote of the Governors Conference adopted
m
lieu of Vote S of the Transit Managers1 Conference.
RECOMMENDATIONS TO EXECUTIVE COMMITTEE
BY THE TRANSIT MANAGERS
Morning, afternoon and night sessions were held on
October 6th ana 7 th.
The deliberation of the Conference resulted in the
passage of the votes recorded below, every representative being
881
5*56 - a*
- 2 -
present when each vote was taken., except that in one or two cases
representatives absent for a fow minutes authorized the Secretary
to record their votes:
1*
Voted -
That we heartily favor every extension of the ^
operation of a check collection system consistent
Concurred in
by Governors
with sound principles and permissible under the
Federal Reserve Act.
2,
Voted -
The deliberations of this body are based on the
assumption that every member bank is required by
Concurred m
by Governors
lav/ to cover at par all checks and drafts drawn
upon it received from the Federal Reserve Bank of
which said bank is a zpember.
3*
Voted -
Immediate debit and
credit not required*
*'r. Pike of Atlanta a&ked to be reported as voting
nN o ."
•
That the Federal Reserve Bank should have the
privilege at its discretion of accepting check?
Concurred m
by Governors.
on any bank, banker or trust company.
a
Voted -
Unanimously carried.
We recou* end that the actual expense of handling
items on non-member banks shall be assessed by the
Concurred in
by Governors.
Federal Reserve Bank against the member depositing
such itens with the Federal Reserve Bank.
Unanimously carried.
5*
Voted .»
That consideration of a service charge by the Federal
Reserve Ba.nks
Concurred m
by Governors
.or collection of checks on member
bank? deposited with the Federal Reserve Banks be
deferred at this time.
Carried without a dissenting voice
_
6
.
Voted -
3
_
_
586
- a.
WHEREAS, Section l6 of the Federal Reserve Act
stipulates that Federal Reserve Banks shall accept
at par from their member banks checks and drafts on
their members, this Conference recommends to the
Governors* Conference that this provision of the
Concurred m
by Governors*
Act be developed by the several Federal Reserve
Banks on a deferred credit and deferred debit basis,
but we believe that the privilege to handle items
on an uuediate debit and credit basis, so far as expedient to do so, should be granted.
Carried.
Mr. Pike voting ’*No", explaining that the Atlanta
directors are on record as being opposed to putting
into effect any system of clearing on a par basis.
7•
Voted -
That items sent to Federal Reserve Banks should not
be counted as reserve until credited by the Federal
Reserve Bank, but in computing reserves the total
Concurred m
by Governors.
amounx of sucn items may be deducted from the member
banks' gross demand deposits.
Unanimously carried.
8.
Voted -
Substituted
by Governor*
That anjr plan for the interchange of checks between
districts should apply only to those banks vtfiich do
not impose restrictions as to endorsements.
Unanimously carried.
9-
Voted -
We recommend that the matter of transfers of funds
for member banks between the several Federal Reserve
Banks be handled on the basis outlined by the Gov
ernors of the Federal Reserve Banks at their recent
Conference until such time as the intraudistnct
884
536
- U -
Concurred in
by Governors.
- a.
clearing facilities are developed to an extent which
'•will justify a reconsideration of this question*
Unanimously carried.
10.
Voted -
It is the sense of this meeting that transfers of
funds between any two banks in- any Federal Reserve
Concurred in
by Governors.
District should be made by means of direct order
rather than by checks and drafts.
Unanimously carried.
11.
Voted -
Concurred in
by Governors.
That the j.irec interchange of items between members..
by settlements through the Federal Reserve Banks be
encouraged.
Unanimously carried.
12.
Voted -
We recommend to the Executive Committee of the
Governors’ Conference that a system of Inter-District
Collection be inaugurated at once as follows:
Each Federal Reserve Bank will accept from any of its
member banks for deferred credit and deferred debit
a.t par, in accordance with the provisions of Section
l6 of the Federal Reserve Act, checks and drafts on
member banks in any of the other Federal Reserve
Districts.
Each Federal Reserve Bank will agree to accept at par
.from other Federal Reserve Banks checks and drafts on
its own members for credit a certain number of business
days after the receipt of such checks and drafts, said
number of days to be based upon the average length of
time necessary to obtain returns from its members. Upon
885
886
-
5
-
586 - a.
receipt of advice from the other Federal Reserve Banks
as to the number of days determined as aforesaid each
Federal Reserve Bank will prepare a schedule of deferred
credits applicable to checks on other Federal Reserve
Districts deposited by its members.
Every Federal Reserve Bank operating on a deferred debit
and deferred credit basis within the district will in*
elude In said schedule of deferred credits indication
of the number of days for which it will defer credit
to its members of checks and drafts on other members
in its district.
Each Federal Reserve Bank will, if possible, avoid
having more tnan tnree classes of deferred credit,
and will request its member banks to sort items in
accordance with the number of days for Much credit
I.* deferred, and to list in one letter all the items
for which credit will be deferred the same number of
days, furnishing th6 Federal Reserve Bank a separate
letter for each cl?ss of deferred credit, as well as
another lotter m Much will be listed all items to
be accepted for immediate credit. Debit against a
i.eirber bar^s account of checks and drafts drawn upon
it will be deferred for the same number of days for
wnich credit is deferred in accepting such items from
other members of the district.
Letters of transmittal to member banks will show plainly
the date on vdiich the items listed therein vail be
887
. 6-
536 - a.
charged to the member hank's account.
Each letter
of transmittal to a Federal Reserve Bank will show
/
"plainly the dato on which credit is expected in ac
cordance with the schedule of deferred credits, and
„ will he charged to the Federal Reserve Bank on 3aid
date.
In order to guard against tne great congestion in
cident to taking on at once a large increase in the
volume pf items, the plan should he developed in
progresoive stages hy beginning with checks, each one
of which anounxs to $1*Q00 or more, and gradually
reducing the limit as to the amount of each check until
the limit can he safely removed*
Changes m said
limits shoaid he identical in all districts both as
to the amount and the aatc on jhich the change is made
effective.
Nothing in the foregoing shall he construed
as
prohibiting any Federal Reserve Bank from continuing
to handle such items as it is now receiving.
In order to shov how schedules of deferred credit may
he made up in each district, there
13
herewith submitted
a tentative schedule applicable to checks deposited
(See Exhibit MAM)
in the Federal Reserve Bank of Chicago by its members.
In accepting checks from other Federal Reserve Banks,
Chicago will give immediate credit for checks on mem
bers of the Chicago Clearing House Association, and
888
t
- 7 - "
536-a-
will defer for two days credit of checks and drafts
on other hanks in its district.
This plan contemplates that Federal Reserve Banks
particularly may. adopt short-cut methods for eliminat
ing time in receiving credit.
For instance, if Chicago accumulated a large volume
of items on Seattle, it would expect to send such
items to Seattle for account of the Federal Reserve
Bank of San Francisco, after agreeing with San Fraacisco as to a basis of deferred credit for our Seattle
letter
889
5*6 - a.
EXHIBIT
SCHEDULE p? DEfERRED CREDITS FDR DISTRICT NO. 7.
'
Illinois
TWO DAYS.
(Except Chicago Clearing House Banks - inarmedlate credit)
Indiana
and all Federal Reserve Cities
except San Francisco.
Iowa
Michigan
Wisconsin
FOUR DAYS.
Alabama
Maine
North Dakota
West Virginia
Arkansas
Maryland
Ohio
Colorado
Massachusetts
Oklahoma
Connecticut
Minnesota
Pennsylvania
Delaware
Mississippi
Rhode Island
District of
Columbia
Missouri
Florida
Nebraska
South Carolina and San Fran~
eisco, California*
South Dakota
Georgia
New Hampshire
Tennessee
Kansas
New Jersey
Texas
Kentucky
New York
Vermont
Louisiana
North Carolina
Virginia
,
EIGHT DAYS.
Arizona
Nevada
Washington
California (except San Francisco)
New Mexico
Wyoming
Idaho
Oregon
Montana
Utah
890
-5 86-b-
P L A N
g,
A PLAN T O R CLEARING AMD COLLECTING-CHECKS
BY FEDERAL RESERVE BANKS.
(Suggested by Mr.W, S, Rowe of Cincinnati,Ohio)
Every Federal Reserve Bank would send a circular to its
members stating that it proposed establishing a Clearing House,
Department ( as required to do by the Federal Reserve Board,
acting in accordance with the terms of the Act) for its members,
accepting from its members and from any member bank in any other
district, any item on member banks in its own district, and to
charge for that service, a rate based both upon the volume in
thousands and the actual number of items handled to cover its
expenses, such rate to be determined by experience and then
fixed by rule of the Federal Reserve Board.
On the other hand, the Federal Reserve Banks would state
in the circular that they proposed paying each member bank for
the service rendered by the member bank whose items sent £o
the Reserve Bank Clearing House had been offset against items
on the member bank.
This charge also would bo determined by
experience, to be based upon ths volume in thousands, and would
then be fixed by rule by the Federal Reserve Bank.
These
rulings as to charges would undoubtedly vary from time to time,
depending upon conditions and seasons,
*
*91
l
- 2-
The circular would then recite that if any member bank
proposed sending items on member banks, bearing the endorsement
of a non-member b a n k , the service, chargg, would be at a higher rate,
as non-member banks either directly or indirectly, should not reap
benefits at the same cost as the member banks.
And further, any
member bank, desiring the privilege of having checks of a neigh
boring non-member bank treated as though such checks were drawn
upon it, might apply to, and this application might be granted by
its Federal Reserve Lank.' The rate of compensation to the member
bank for clearing these items and the rate to be charged for col
lecting items on such non-member banks f or whom arrangements as
above had been made, would also be fixed by rule, but these rates
would be higher than member bank check rates, thus operating as
an additional reason why non-member banks should join the system,
as ultimately it would .cost a merchant more to collect .items on
non-member banks, than.to collect items on member banks, and more
.
,
to deposit items in a non-member bank than in a member bank, if
this plan lecomes operative in its fullest extent.
Under this plan, we for example, the First National Bank
of Cincinnati,Ohio, would arrange to have checks drawn on a given
list of non-member banks treated as though they were checks on
ourselves, and after the Cleveland Lank had completed making such
arrangements covering every non-member bank in the district, it
would mail an announcement saying that it was prepared to accept
through its clearing house department, any items on non-member
banks, as well as any items on any of its own member banks, the
i
3-
■'586“b,‘
charge* and payment to member banks to be determined later, as
outlined above, and that it v/ould credit or charge each member
bank's account at the day's clearings, with the difference be
tween the items sent through the clearing heuse, and the items
received at the clearing house.
It is manifest that these operations of the clearing
house department would not affect in any way, the total deposits
of the Bank, as credits and debits would .equal. In the banking
department .however, a credit from the clearing house department
might be immediately withdrawn, while a debit might even overdraw
another account.
To provide for this, rules in regard to main
taining a deposit in the Clearing House Department, to cover
items to and from'the Reserve Bank, should be promulgated,based
\
upon fairness to the member banks and safety to the Reserve Banks.
The proportionate relation between volume of items on and col
lected for a bank, to its required reserve, should affect the
size of the clearing balance.
Inasmuch as similar notices would have now been sent
out by the other 11 Banks, we would receive one from each of the
other 11 Banks, stating that each Federal Reserve Bank would re
ceive items in its Clearing House Department from any member
bank or any bank in the district, and atating that each Federal
Reserve Bank would take from any member bank^outside af its
district, any items on member banks or non-member banks, and
that it would remit, after deducting a fair charge, to the send
-4
-586-b-
ing Bank's Reserve Bank for its credit.
This remittance would
then be credited to the account of the member bank by each R e
serve Bank when received, subject to a slight charge, and as
the settlement between the tv/elve Reserve Banks at the olose of
each day would be large, they might even be cleared as between
themselves by telegraph each afternoon, and adjustments made
through the main Clearing House of the tv/elve banks, at the
'(
office of the Federal Reserve Board, through the gold fund al
ready created.
From a practical point of view^ we would then write a
letter to each of the tv/elve Reserve Banks, instead of writing
as we do now, more than 500 letters, and would list items very
much the way we do when sending items to Chicago, drawn on many
different places.
Chicago does not demand now that we sort
•ur items based upon4the places ef payment, and we can see no
reason v/hy the Reserve Banks should, as they should be able
to sort an immensely larger volume of items than the ones we
would send, at a lower cost, and we would be paying our pro
portion of such cost.
Our endorsement on such items should read :
"Cleared through federal Reserve Bank of ____ _ J'
followed by our name and the date sent, as well as the date it
should fe cleared unless letters are delayed in transit, and
accordingly the actual date of clearing changed.
endorsement would fee necessary.
No additional
Our entry on our books would be
t
; 895
-5-
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-586-b-
to charge each Reserve Bank with the total of our letter, and in
figuring reserve, our
balance at Cleveland would be counted, while
the amount of the total letter sent to the other Banks would not be
reserve.
This other total,however, v/ould undoubtedly not equal the
total of our present balances in St.Louis, Chicago,New Orleans, New
York, Albany, Boston, Baltimore, etc., even after allowing for such
balances as we would wish to continue to keep in larger cities for
exchange and other purposes.
If telegraphic remittancewas a rranged for with each of
$he other eleven banks, we could make the entry on our books covers
!
*
ing letiB rs sent today as follows:
v/e could charge Cleveland with •
the total of the letters to Richmond, St. Louis and Chicago after
one day; New York, Philadelphia, Boston, Kansas City, etc. on the
etc.,
second day, and finally San Francisco/on the fifth day. Obviously
tlie accumulation of such letters in transit before they reached
their destination would hot' bo vjry large.
Return items might be handled in two ways, either through
the Reserve Bank which had previously cleared them, or direct to the
memlber bank.
Experience would show which banks would be more usually
creditors at the daily clearing, and which banks would more usually
be debtors, and the rules suggested heretofore in regard to main
taining of balances on the books of each Reserve Bank could only
be promulgated so as to-be fair, after experience reached through
a trial.
Banks having customers apt to check unusually heavily
should prepare themselves, and might well v/atch thejfcr larger ac-
A:
-586-bcounts; and such action would be in the interests of good banking.
This plan then contemplates,although many details are omitted
or only inferred, the establishing in each Reserve Bank of the fol
lowing departments;
(I)
Clearing House Department, in which all items on the
district are cleared and in which department suitable
and fair excess balances must be maintained.
(II) Exchange Department. in which department the twelve
Reserve Banks would clear as between themselves, and
also clear the credit turned over from the resultant
, credit-«$f a member of another district, whose checks
on that district had been cleared in Department I.
(ill) Banking Department, in which only currencv and drafts
on itself would be accepted at par, and the resultant
credit or debit after the days clearing in Department I
would only-be credited or charged to the member banks
reserve account in this department, after deciding that
the clearing balance in Department I was satisfactory.
The Banking Department would also include the other
functions of discount, examination,etc.
Thus the charges in Department I vjould be fairly large,
based upon total in dollars and total number of items, and would
also be reciprocal to cover expense incurred in restoring balances.
J
'
.
Charges in Department II would to smaller and charges in
Department III would btr nil, in so far a 3 " cash items" are con
cerned.
Cf course, "collections" as distinguished from "cash
items'1 could easily be handled upon a cost basis in either De
partment I or Department III.
3/20/16
897
586 ~
P L A N
N 0.
4i
A COMPOSITE OF VARIOUS SUGGESTIONS FOR CHECK COLLECTION
AND CLEARING UNDER THE FEDERAL RESERVE ACT.
Predicated on the theory that the practical and perhaps
tho legal requirements demand that a check,, bping an order to
pay cash at the counter of the Payee Bank, must be sent to the
Payee Bank and be in the hands of that bank before it can be
charged against it and credited to the Depositor.
1.*
Under Section 16 of the Federal Reserve Act, the Federal
Reserve Board nay require each Federal Reserve Bank to act as a
Clearing House for checks drawn on banks of its District.
In vie//
of the further transfer of reserves on liay 16tb, the Board has
set June 1, 1916, as the date when these functions shall be unr
dertaken in a complete manner.
Every member bank handling many checks shall send in
twelve separate envelopes, one to each Federal Reserve Bank,
checks against banks of its respective district;
provided,
however, that a bank having less than, say fifty items for any
given district may if it prefers send those items to its own Fed
eral Reserve Bank for sorting and transmission.
3.
Checks on banks in the same city clearing house district
shall be given one day deferred credit and debit but all. other
checks in same district shall be given two days deferred credit :
and debit, unless the one-way time shall exceed that amount, in
which case deferred credit and debit, equal to the one-way time,
shall be fixed.
898
_2
4.
5^6 - c
Checks on hanks in other districts must he given a
minimum deferred credit and dehit of two days and an increment
over this i£, and hy as much as the one-way. time from the send
ing hank to the Federal Reserve Bank of the district on which
check is drawn, plus the time from that Federal Reserve Bank
to the payee hank, exceeds this two days.
5.
Banks sending checks to Federal Reserve Banks of
other districts shall claim credit for their own Federal Re
serve Bank Exchange Account, sending duplicate of letter of
transmittal to their own Federal Reserve Bank.
6.
Nothing in the above shall prevent hanks in neighbor
ing cities sending checks direct to other hanks provided that
time is saved hy so doing; thus Rochester, N. Y. and Buffalo, N. Y.;
New Haven, Conn, and Hartford, Conn, might interchange checks on
any mutually satisfactory basis if by doing so time is saved and
float diminished.
7.
The Federal Reserve Board will authorize Federal Reserve
Banks to charge their own members as follows:
per item plus
10# per thousand on all collections made for sending hanks; at
the same time, the Federal Reserve Board will authorize member
hanks to charge Federal .Reserve Banks or other member hanks, sending
checks for collection, 10# per thousand upon all items sent.
tlements to he made monthly.
Set
These charges, subject to modifi
cation on sixty days notice, are intended to cover approximate
average cost of remitting cash or exchange to meet halanflos or
reserve requirements.
899
- 3 -
8.
5^6 - c
Menber banks will be authorized to make collections of
State bank items m
their own town or within a convenient radius
of operation and will be authorized to charge for this service the
amounts above quoted or a3 much as the actual cost of the service
should it exceed this amount - all such rates to be approved by
the Federal Reserve Board.
3*
Under the above arrangement every Federal Reserve Bank
may be expected to receive direct from perhaps 3;000 banks bundles
of checks dravn against its members.
Those deposited by its own
members are credited to the exchange account of the District repre
sented by the depositing banks and debited against the drawee bank,
according to the time schedule above referred to, while those sent
from banks in other districts are credited to the exchange account
of the Federal Reserve Bank of the district represented oy the send
ing bank and debited simultaneously against the drawee bank.
10.
A Federal Resexve Bank each night will have on its books
amounts representing the aggregate of the above credited items,
a.!} of wnich have been charged against its own member banks, it
will wire the amounts of these credits to tne various Federal Re
serve Banks and receive from these eleven Reserve Banks advice of
the credits they have to its account.
If as is assumed each Fed
eral Reserve Bank keep3 with every other Federal Reserve Bank an
account ijor exchange purposes which may run a reasonable credit or
debit either way, it is safe to eay that m
most cases tne result
ing debits and credits by these daily balances will only need to be
settled once or twice a week through the Gold Settlement Fund.
-
11
586 - c
k -
The above plan gi\e* deferred credit and debit to the
bank for all checks outside the home city starting with two days,
but not beyond that in exces* of the one-way time between districts,
plus the one-way time from toe Federal Reserve Bank of the drawee
bank to that drawee bank.
The time of transit i* greatly shortened
as compared with the methods commonly in vogue by reason of the
direct routing and of uaing tne twelve Federal
Reserve Banks as
clearing houses, each a focussing point for the checks of the
district.
Tnu*, the Fir*t National Bank of Columbus, Ohio, will
send' ito Cleveland District checks to the Cleveland Reserve Bank
for dopooit, tlaiiiii/ig immediate credit two days later, at the
same time it 3ends Chicago District checks to the Chicago Reserve
Bank, St. Louis District checks to the St. Louis Reserve Bank,
etc.
Theoe checks reaching these Federal Reserve Banks the
next day sent to the drawee oanks and m
most cases are charged
the following day again*t the accounts of the drawee bank and
credited to the exchange account of the Federrl Pescrve Bank oi
Cleveland
Thus the First National Bank of Columbus will c l a m
two days deferred crediT for Cleveland items and, m
mo*t case3,
two day* deferreo credit for items dravo on banks m
the Chicago,
St
Louis, Atlsuta and Ricrmond Diotncts, and proportionately
later datings for more distant'..Districts
It is safe to say
teat a very large proportion of the business of the country m
check clearing would be done on a two days deferred basis12
The obvious advantage of this method is the direct and
simple routing of all iteri3 and the consequent reauction of float,
hlhereas large city banks are now required to send checks for
collection to some 500 points, under thio
plan,
they would
901
- 5 -
5 g6 - c •
be enabled to send checks to twelve centers, and perhaps five or
six other points with which the interchange of checks i3 con
siderable.
Generally speaking, the clearing and collecting of
checks is by thi3 plan focussed and concentrated at twelve Federal
Reserve Banks with a minimum oi delay.
At the same time small
country banks would be given the privilege of sending all their
checks regardless of the district on which drawn to their Federal
Reserve Banks, or to some correspondent bank for collection and
credit.
13.
The reason it is not necessary to defer debit and credit
beyond the one-way time may be thus illustrated:
for the sake
Let us suppose,
of an argument, that the Federal Reserve Bank of
Chicago sends to its Agent at Des Moines all the items drawn
against Des Moines Banks.
That agent presents the checks next
morning at the various banks and draws out cash or takes a credit
on the local b a n k13 books.
Having thus accumulated in the five
local banks, say $250*000 in cash or credits, he wires or tele
phones the Federal Reserve Bank of Chicago of the fact.
The Fed*
oral Reserve Bank of Chicago replies that it has itself received
in checks sent by Des Moines banks against Chicago hanks items
aggregating $260,000 and that it is, therefore, not necessary for
the Des Moines agent to remit any cash or exchange, because the
drawings on Des Moines are more then offset by the drawings on
Chicago; in fact'that Chicago must send Des Moines $10,000 as a
balance.
However, as the amount is small and the balance may
-,6 -
$S6 - c *
may be reversed the next day, it ib agreed between the agent
and principal that the brlance in favor of Des Moines shall be
allowed to stand.
It will thus be seen that thio plan of credit
and debit deferred to equal tne one-way ti„e a.&'its the principle
that the payee bank 3hall see iters drawn against it before having
these items charged against its reserves and enables it, if any
of these iters are unusually large, to nake a special arrangement
by wire or telephone to meet them.
3/20/16
✓
903
586 - d.
P L A N
N 0 .
5.
Memorandum and Plan submitted by the Governor
of the
Federal Reserve Bank of Dallas, Texas, under date of March
15, 1 9 1 6 , for the Clearing of Checks under sdiat may be des
ignated as the Talley System of Offsets.
After careful consideration of all suggested or proposed
plans for a clearing or collection system which have come to our
notice, the officers of the Federal Reserve Bank of Dallas are
firmly convinced that none can ever be adopted vtfiich will be ac
ceptable to the member banks or satisfactory to the Federal Re
serve Banks unless it be based upon a system of offsets, or what
is known as the clearing principle in use by all of the local
clearing houses of this country.
The Cashier of the Federal Reserve Bank of Dallas, Mr.
Lynn P. Talley, has made a thorough study of the details of such
a plan and an outline of the fundamental details of the restiit of
his study is presented below.
with the plan of operation m
This plan is not to be confused
use by the Boston Country Clearing
House and other similar Country Clearing Houses which are nothing
more nor less than Joint Collection Agencies.
Some of its advantages are as follows:
(1)
An immediate debit and credit system would of neces
sity, frequently impair and destroy reserves and place upon the
Federal Reserve Banks such a burden of "float" that their usefulness
would be seriously impaired.
On the other hand a deferred debit
and credit system would place upon the member banks the entire burden
> 904
_ 2 -
5*6 - d.
of "float", without offset, on which account it would he used only
to a very limited extent.
The plan proposed is, in effect, an
immediate debit and credit system to the extent of the amount of
offsets, with a minimized deferred debit and credit of only the
amount of the resultant balances, which deferred debit and credit
is equitably distributed#
(2)
This plan provides for the payment of items by the
drawee bank only at its counter and after it has inspected
(3)
the items#
The. reserve balances of a member bank with the Federal
Reserve Bank are debited only at the direction of said member bank,
which therefore has knowledge at all times of the condition of its
reserve.
(U)
The cost is minimized and is equitably distributed
among the banks receiving the benefit of the transfers of funds
necessary to complete the settlement.
(5)
•
The plan of apportioning returns to the creditor,
banks in the order of their size (Section 2 (e)) is based upon the
axiomatic principle that one day's interest on $10,000. is equal to
five days' interest on $2,000., and is the mo3t equitable manner
of facilitating settlements.
x
x
x
x
x
x
x
::
x
We were so sure of the practicability of this plan that on
Monday, December 27, 1915> we inaugurated, in the Federal Reserve Bank
of Dallas, a "Reserve City Clearing House", made up of the thirtythree member banks in the six reserve cities of this district, which
has proved the success of the plan and has been so satisfactory to
the participating baftks that it is still in operation and will be
- 3-
586 - d
continued until superseded "by some plan promulgated by the Federal
Reserve Board.
The total amount of items cleared through this Reserve
City Clearing House from December 27, 1915# to March 15/ 19^6,
was $85,6 3 7 ,6 0 2 .9U, with resultant balances amounting to $20,97*+UI8 .U2 .
Of this amount of balances $0,87*+,900. of the debits
were settled through deposits of Eastern Exchange; $3,108,000. by
deposits of currency; $7,088,518.U2, by instructed debits against
reserve balances in this bank; while $1 ,903,000. was settled by
arrangements between debtor and creditor banks in the same city.
We believe that a careful study of the following outline
will convince any one of the practicability and simplicity of the
plan.
OUTLINE OF FUNDAMENTAL PRINCIPLES
OF THE TALLEY PLAN OF CLEARINGS
The plan proposed contemplates a Federal Reserve District
Clearing House, and each Federal Reserve Bank, in handling clear
ing items for its members through its Clearing House Department
shall act as agent only and shall not become responsible in any
manner whatever for delinquency or default of any member.
It is proposed that each Federal Reserve Bank shall in
augurate a Clearing House Department along the following lines:
(1)
The Clearing House Department shall clear for
the member banks of its district checlcs and drafts drawn
upon
zi\r other member bank of the same district except such
905
906
506 - d.
_ U -
as are drawn by or endorsed by banks which are not members
of
the Federal Reserve System.
(2)
The total of items received from a member bank
shall be credited to 3uch member on the credit aide of the
Clearing
House balance sheet.
The total of items received against a member shall be
debited to such member on the debit side of the Clearing House
balance sheet.
Resultant balances between “Items received" and "Items
sent" fren and to a member bank will be settled from each de.y*s
settlement sheet in the following manner;
(a)
All items received through the Clearing House on
a given member will be forwarded immediately to said member,
properly listed and totaled, which list shall be made in dupli
cate and shall show from whom received.
The duplicate list shall
be a part of the Clearing House records.
(b)
The Clearing House shall forward to each member
interested in the day's clearings a slip showing
total of items
received from thafc member, total of items sent to that member, and
the resultant credit or debit balance due to or from that member.
(c)
The Clearing House shall prepare and send to each
*
member receiving a debit balancd in the day's clearings a settle
ment check for the amount of such debit balance, which check shall
be drawn against the reserve balance of such member in the Federal
Reserve Bank and shall be payable to the District Clearing House.
(d)
This check shall be immediately 3igned by the
907
-
5
-
5^6 - d-
proper officer of the member bank and returned to the Clearing
House to be apportioned among the creditor banks.
If the payment
of this settlement check would reduce the reserve account of the
member bank below the required amount, it shall be the bounden
duty of such member bank to accompany said settlement check with
a deposit of acceptable funds sufficient in amount to make good
the required reserve.
(e)
The amount of the first settlement checks received
from debtor banks shall be apportioned to the bank receiving the
largest credit balance in the clearings of that day, then to the
second largest, and so on down, each creditor bank receiving credit
in its reserve account for its credit balance as soon as settlement
checks sufficient in amount have been received and paid by the
Federal Reserve Bank.
(f)
Clearings 3hall be made on each business day, and
neither debit nor credit balances may become cumulative, but each
day's clearings must be settled separately.
(g)
Advices of all debit balances amounting to twenty-
five thousand dollars ($2 5 ,000) and over will be telegraphed to
the owing bank.
(h)
When, in order to meet it3 settlement check only,
it becomes necessary for a debtor bank to ship currency to the
Clearing House, said debtor bank shall be entitled to and receive
the actual minimum cost of transportation from its office to the
Federal Reserve Bank of such currency actually shipped, providing
advice of such cost accompanies the settlement check.
Such cost
SOS
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5S6 - d.
shall he credited to the* reserve account of the shipping member and
shall be proportionately charged to the reserve accounts of all mem
bers clearing items on the shipping member on that day.
(i)
Debtor banks., in order to prepare their reserve ac
counts to meet their settlement checks, may make remittances in.
New York, Chicago ar St. Louis exchange at the rate promulgated by
the Federal Reserve Bank for such exchange.
(j)
Settlement checks must be signed and returned to the
District Clearing House on the same day they are received by the
debtor bank.
(k)
In the event a member bank receiving a debit balance
in the District Clearing House fails to pay such debit balance promptly,
or fails to provide funds in its reserve account with the Federal Re
serve Bank to meet its Clearing House settlement checks, or sus
pends payment and is placed in the hands of a receiver, or otherwise
becomes unable to meet its obligations on demand, or is otherwise
insolvent, then the Federal Reserve Bank shall proceed as follows:
The amount of all items on such defaulting bank, which
are in the process of collection or have been sent to such drawee
or defaulting bank and for which payment has not been received by
the District Clearing House, shall be credited to the District
%
Clearing House, and the amount oi each item included in such credit
shall be charged to the reserve account of the member bank endorsing
said item to the District Clearing House Department*
(3)
Member banks may, if preferred, send their items to
any other member bank situated in the prevailing direction such items
909
- 7 -
would take m
may then* m
586 - d
their natural course of collection* and items so sent
turn, be sent to the District Clearing House Department
of tne Federal Reserve Ban!* but m
Bank receive m
no case m i l the Federal Reserve
its Clearing House Department items bearing the en
dorsees Tt of more tnan two member banks.
(lj>)
Unpaid items received from the Clearing Hou©e shall
be returned direct by the drawee bank to the bank endorsing same to
the District Clearing House* and a debit ticket for the amount shall
be cleared on such endorser through the Clearing House* carbon dupli
cate of such debit ticket being attached to the returned unpaid items.
These tickets will be m
certificate form and may become a part or
all of the remittance to the Federal Reserve Bank to cover a Clear
ing House debit
(5) A
slip giving the name of the sending bank and
directing wire advice of non-payment must be attached to each item
of $1*QG0 or over at the time it is sent to the Clearing House De
partment* which instructions must be followed by the drawee baztfc.
(6)
All items of over ten dollars ($10 ) must be sent
subject to protest if not paid.
(7)
The expense of maintenance ana operation of the
District Clearing House Department shall be borne by the member
banks by paying* on the first of each month, two cents for each
item cleared during the preceding month until it io determined by
experience what is the actual cost per item.
When this has been
determined 3uch actual cost shall be paid
(g)
The plan shall be promulgated by tne Federal Reserve
910
- S_
586 - d.
Board and shall be mandatory under the provisions of Section 16
of the Federal Reserve
(9)
Act.
Such general rules and aodifications of rules as
may be necessary m
the operation of the plan may be promulgated
by the Federal Reserve Board from time to time
V
3/20/16.
911
-586-f-
SUPPLEMENTAL TO PLAN NO* 5 SUBMITTED
BY MR. LYNN P. TALLEY,CASHIER OF FEDERAL RE
SERVE BANK OF DALLAS.
0 O0
The fundamental principles upon which any clearing plan
which might be adopted must be based ;
First.
That the face of a check and the back.of a check
are entirely different propositions. Granting that a check is
payable at the counter of the drawee bank and that it is not
incumbent upon the drawee bank to transport the funds to the point
where the holder resideSiat an expense to the payer.
The holder
of a.check at a point different from the place of payment receives
the check for value and determines its v^lue at the time the check
is received and it is then incumbent upon him, either with or with
out previous knowledge of conditions, to convert the check into
funds that he c m use.
Second. That the interchange of items between banks under
present methods perhaps increases the float two or three fold.
Briefly, because a bank concentrates its items with various other
banks of its own selection and the receiving bank must, of course,
stand the burden of float in conversion. A large proportion of
these checks received must be collected by sending them to banks
which will, send the last endorser a remittance drawn on still
another bank, perhaps in another city, with which it concentrates
its items for balances through its own choice. There is then a
float created in collecting returns which have been sent in for
original items.
Third. That this choice of correspondents is largely a
matter of individual right and need not be necessarily disturbed by
breaking off relations of years standing by being compelled to
collect miscellaneous items through the Federal Reserve Bank.
Therefore, the plan provides that a member bank
may sefad its items to another member bank which may, in turn, d e
posit them with the Federal Reserve Bank for credit in the Dis
trict Clearing House, provided such items bear no more than two
member banks' endorsements,including its own, and the prevailing
direction of collection which the item would naturally take is
not violated.
You can readily see that this would permit
the country banks to continue to send their items to city banks
which would have facilities available for collecting them through
the Federal Reserve Bank.
~2-
Fourth.
To minimize the float referred to in (1st) by the
system of offset under the clearing principles; that is to say,
the float would be reduced to collecting the difference between
itei$s sent and received at the District Clearing House, which I
venture to Say 'would be somewhere in the neighborhood of 20 to 25/1
cf the total volume cleared*
In addition there would be a float
equal to thjg transit time between the location of the member bank
and tne Feoer^l Reserve Bunk, which would be equitably distribu
ted between the member banks and involve only their own itemf*
This float, however, could be appreciably* reduced by member banks
sending item? received in volume on any one point direct to the
urawee member banks at that point and sending us a copy of the
letter*
Fifth.
Exchange charges have not been taken into con
sideration in the revised plan submitted in view of the clear
intent of the Act to abolish exchange charges to the point of
only actual expense involved in the transportation of funds.
Since, technically, exchange charges axe based on shipments
of the actual amount of currency representing the difference
in the balance of trade, the cost, under the plan proposed,
would be reduced to a final minimum as remittance would in
volve the settlement of only the difference between items sent
and received.
You can see, therefore, that I have sought
to reconcile conditions- existing heretofore with the new order
of things to the extent that I believe the plan fairly over
comes the objection of the member banks in giving up their ex
change charges by providing them with the most economical facili'
ties at the Federal Reserve Bank for the collection cx items
rather than issuing a mandate that member banks must clear
their items through Federal Reserve Banks*
Sixth*
It is very natural that any plan suggested
would emanate from some large Reserve or Central Reserve city
institution.;- by reason of its wide experience in receiving and
collecting miscellaneous items or by suggestion of one who
had had broad experience along this line in these larger insti
tutions.
3/a/i6
913
5S6 - e.
P L A IT
P 0 . 6^
A PLAN FOB CHECK COLLECTIONS BY FEDERAL RESERVE BANKS.
(Submitted by Mr. Ray M- Gidney of the Staff
of the Federal Reserve Board)
Preliminary Statement
In the consideration by those connected with the Federal
Reserve Banks of the problems connected with the establishment of
check collection service by Federal Reserve Banks, there has been
substantial agreement that the greatest difficulty to be met is
that involved in carrying "float" represented by checks in process
of collection, which might have to be assumed by the Federal Re
serve Banks.
"Float" in this sense may be defined as the exten-
tion of credit which takes place when credit is given for a check
in advance of its actual payment by the bank upon which it is drawn.
Its magnitude is measured by the amount of checks in transit at any
one time, and the "float" for a single item is its amount multiplied
by the number of days which must elapse before it i§ collected.
The question of who should carry the "float" must be con
sidered and dealt with before any plan of check collection can safely
be put in operation.
Three parties may be recognized in this trans
action; the payer of the check, the payee, and the agency through
which the payee attempts -to collect the item.
sented by the bank
The payer is repre
upon which the check is drawn, the payee by the
bank which receives the check on deposit in first instance, and the
collecting agency by the bank which is used as an intermediary in
the collection of the check, in the present situation the Federal
Reserve Bank.
One of these parties must carry the float.
The
general practice now is that parties receiving the check in first
instance carry the float.
A firm or individual receiving a check
and depositing it in a bank is required to keep a balance which will
justify the bank in handling and collecting the check , and as a rule
is not allowed to withdraw the funds in advance of collection by the
bank.
The bank which thus receives an out of town check must in
turn carry the "float" whether it sends the check direct to the pay
ing bank or sends it through.a collecting bank.
it is not permitted
In the first case
to charge the bank upon which the check is
drawn until the latter has received the check and given authority
for the charge.
Even if the check is collected through such an
* J
institution as the Boston Country Clearing House, the bank does not
get its money until two days have elapsed.
If the bank attempts
to collect the check through another bank it does not receive real
credit until the check is collected, although it gets an immediate
credit in appearance, but must keep a "reasonable" minimum balance
on deposit with the correspondent and rhust not draw against items
until they are collected.
The Executive Committee of the Conference of Governors
has recommended that a Federal Reserve Bank, if it is to act as a
collecting agent for it3 member banks, shall not carry the float.
The reasons urged are that to the extent that a Reserve Bank does
so, it impairs its power to meet the requirements of its members for re
discount facilities, and that the amount of the aggregate float of
the country is so large as to absorb
power of the Federal Reserve Banks.
almost the Entire loaning
The Governors also point out
5S6 - e
-3-
the difficulties to be encountered if it is sought to have the
paying banks carry the burden.
Member banks upon which checks
are handled are required to maintain excess reserves equal to the
amount of checks in transit to them from the Federal Reserve Bank
during two or more days' business;
they have no very exact means
of estimating the amount of checks which are thus in transit and
overdrafts are likely to occur with possibility of loss to the.
Federal Reserve Bank.
The Governors do not,however,, except in
connection with their proposed plan for deferred debit and deferred
credit, appear to consider the possibility of leaving the burden ox
carrying the float where it is;
namely with the bank which has re
ceived a check on deposit in first instance and therefore has it to
collect as best it can.
If a method can be found whereby the Federal Reserve Banks
can successfully perform the check collection functions clearly con
templated by the Federal Reserve Act, without carrying the float in
volved, it is obvious that they should not carry the said float. There
is doubt as tc whether they are able to assume the burden of the
float without seriously impairing their loaning power and even if
they are able to do so they should not grant the credit extension
involved without proper remuneration.
They are corporations deal
ing in credit and should not give ax,-ay in any form the goods which
it is their business to sell.
At the same time it should not be
the problem of the Ftoderal Reserve Banks to determine whether the
float shall be borne by the banks upon which checks are drawn or
by the banks which have received the checks upon deposit.
This is
916
-4-
586 - ©•
a matter of general business arrangement with which the Federal Re
serve Banks are not directly concerned.
The purposes of the Act
will be carried out and the usefulness of the Federal Reserve Banks
greatly increased if they are able to provide prompt collection at
par of checks drawn on member banks and prompt collection, with a
moderate exchange charge of checks drawn on non-member banks in
cities where there are also member banks*
To this end the following
plan, combining features of both the immediate credit and debit and
the deferred credit and debit plans, and based upon the assumption
that member banks can be required to remit promptly at par for checks
on themselves sent to them by the Federal Reserve Banks, is submitted:
Details of Proposed Plan.
Each member bank will carry
‘'clearings account1
.1
the
books of its Federal Reserve Bank, in addition to its reserve account.
All deposits of checks drawn on member banks will be credited to the
depositing banks in their clearings accounts and charged to the
member banks upon which the checks are drawn, in their clearings
accounts.
The depositing banks will be permitted to draw against
the balances resulting from deposits of checks on other member banks
only after a suitable time has elapsed to permit collection of offset
of the items.
The length of time which it will be necessary to
delay such withdrawals will vary in the different districts, reaching,
a maximum in the San Francisco District, and can be finally determined
only after some months of experience in the operation of the planTo start with sufficient time should be allowed for the checks to
reach the paying banks and a remittance in payment to be received in
»
-5-
return.
586
— 9•
The immediate result of this operation will be that the
depositing banks will have credit balances and the paying banks
overdraft balances, and as the overdraft balances will just off
set the credit balances „
it v/ill not be necessary to maintain
a reserve against the latter.
In the case of a district in which
practically all banking points can be reached by mail in one day
the banks which acquire credit balances m i l be permitted to with
draw any portion of such balances representing deposits made two
days or more previously .
In this way, even assuming that the pay
ing banks have not themselves made deposits of checks on Other member
banks and thus become creditors as well as debtors, they will re
mit funds in time to.meet the withdrawals permitted so that over
draft accounts will not exceed the credit balance accounts.
If, however, the banks which we have been considering as
the paying banks are constantly mailing checks to the Federal Reserve
Bank for deposit, their remittances will arrive in such manner as
to offset the checks against them and thus reduce the time of float
by one-half.
To what extent this will occur can of course only be
determined from the actual operations of the clearings system, but
it is certain that the offset principle will be operative to a very
large extent as operations become general.
Through this reduction
in the time of float the average time which must elapse before a
member bank can draw on a deposit will be proportionately shortened.
This matter of offset is of greatest importance and in it lies the
superiority of the plan which is given here over the plan under which
the Boston Country Clearing House is now operating and over the plan
_6
5S6 - e.
of deferred credit and deferred debit proposed by the Governors of
the Federal Reserve Banks.
It is much as though the New England
Country Banks instead of awaiting receipt of their checks from the
Boston Country Clearing House and then drawing a draft on a Boston
correspondent bank in favor of the Clearing House
for the amount
of the remittance, were to send daily to the clearing house all
checks on Boston which they might receive in the course of business
instead of sending them to Boston correspondents against whom they
later issue a draft in payment.for the checks received through the
clearing house.
It is clear that if this were done the effect
would be to shorten by one-half
time required for the collection
of checks sent out by the Boston Country Clearing House.
The following example will illustrate the ..operation
of
offset, the first column showing a case in which offset is effective
and the second column a case where it does not operate and in which,
as with the Boston Country Clearing House and the Governors' plan
of deferred credit and debit, a return remittance must be awaited.
A member bank in Philadelphia deposits vsith the Federal
Reserve Bank of Philadelphia on a certain day for credit in its
clearings account, checks.aggregating $?5.*000 on a member bank in
Harrisburg, Pa.
action:
The following will be the course of the trans
919
5 S6
-7-
With offset*
On the same day the Harrisburg member
bank mails to the Federal Reserve Bank
of Philadelphia for deposit in its
clearings account, checks on the Phila
delphia member bank amounting to
$25,000.00. Entries will be as follows:
Day of remittance:
- a.
Without offset.
'On the following day and upon re
ceipt of the remittance the Harris
burg member bank issues and forwards
to the Federal Reserve Bank of Phila
delphia, its draft on the Philadelphia
member bank, for $25,000-00. Entries
will be as follows:
Dav of remittance:
Philadelphia member bank charges
Federal Reserve Bank of Philadelphia,
$2 5 ,0 0 0 .
Philadelphia member bank-charges
Federal Reserve Bank of Philadelphia
$2 5 ,0 0 0 .
Federal Reserve Bank of Philadelphia
credits Philadelphia member bank,
$2 5 ,0 0 0 .
Federal Reserve Bank, Philadelphia
credits Philadelphia member bank,
$2 5 ,0 0 0 .
Federal Reserve Bank of Philadelphia
. Charges Harrisburg member bank $25,000
Federal Reserve Bank of Phila.
charges Harrisburg member bank
$2 5 ,0 0 0 .
Harrisburg member bank charges Federal
Reserve Bank of Philadelphia $25,000.
First dav following:
Harrisburg member bank receives
remittance from Federal Reserve Bank
and credits account of the latter
$2 5 ,0 0 0 .
First dav following:
Harrisburg member bank receives
remittance from Federal Reserve
Bank and sends in return draft on
Philadelphia member bank $25,000.
Federal Reserve Bank receives re
mittance from the Harrisburg member
bank and credits account of the
latter,$2 5 ,0 0 0 .
Federal Reserve Bank charges Phila
delphia member bank $2 5 , 0 0 0 and
delivers by messenger the drafts,
etc., received from the Harrisbutg
member bank.
Philadelphia member bank credits
Federal Reserve Bank $25,000 for
items thus received.
Transaction closed.
■,
Co1le ct ion example, continued •
_____________ Without offset.
Second dav following:
Federal Reserve Bank of Phila
delphia receives remittance from
Harrisburg member bank and credits
account of the latter, $25 >000 .
Federal Reserve Bank charges Phil
member bank
and delivers
messenger the? draft received from
the Harrisburg member bank.
Philadelphia member bank credits
Federal Reserve Bank $25>000 for
draft thus received.
Transaction closed.
Reserve status of clearings accounts.
Such portion of the balance of each member bank in its clear
ings account es is available for withdrawal may be counted as reserve,
for it can at any time be withdrawn or transferred to the regular reserve
account, but such portion as is not available for withdrawal
should not
be so counted as it represents uncollected items.
Neither should the
Federal Reserve Bank to required to hold reserve
against the portion of
the clearings accounts representing uncollected items,but it should be
required to hold reserve against that portion which represents items
which have been collected and are therefore subject to withdrawal at
any time.
It will be objected by seme that the credit given to member
banks which deposit items in the clearings account will not be "immediate
credit".
This is true, but the credit given is certain to be more
nearly immediate than would be give?i under the deferred debit and credit
plan proposed by the Governors, which Joes not contemplate offset, of
5S6 - e.
- s -
of items but apparently treats each remittance as a unit
for separately*
to be settled
It will also be more nearly "immediate credit" than
is given to banks which collect through the Boston Country Clearing
House and than that given by check collecting banks which do not per
mit withdrawals until the item is collected and which dp not _uti1ize
the practice of offsetting; items*
It would be well to provide that
the credit may be made immediate
in fact as well as in name by per
mitting a member bank which wishes to withdraw a balance created by
deposit of items on other member banks or to count such balance as
reserve, before the items have been collected or offset, to do so by
paying interest thereon at the rate in force for discount of short
term pa,per*
In such case the Federal Reserve Bank would assume float
to the amount involved but would be properly reimbursed for so doing*
Prompt remittances at par are essential to the successful
operation of this plan*
Where a bank does not remit' promptly an
interest charge at the rate current for short-term paper should be
assessed against it for the time of such withholding on the amount
of items upon which prompt remittance is withheld*
Chocks on non-member banks*
It is quite generally agreed that checks on non-member banks
must be handled by the Federal Reserve Banks in order to make the check
collection system completely successful*
This step should be taken at
once in connection with the £ian here submitted and with the cooperation
_ 10 -
of member 'banks.
5^6 - . e.
Arrangements can doubtless be entered into with
most member banks under which they will handle checks on non-member
banks in their respective cities and towns at a charge of five or
ten centa per hundred dollars, such charge to be computed on the
total amount of such checks sdnt in a remittance letter.
Checks
on non-member batiks in cities where there are also member banks, may
then be received by the Federal Reserve Banks just as checks on member
banks will be, but subject to a collection charge of five or ten cents
per hundred dollars.
This plan will doubtless prove sufficiently
remunerative to the member banks handling the checks and will result
in many State banks entering the system.
The facilities which the
Federal Reserve Banks will thus be able to offer will greatly exceed
those offered by any country clearing house.
Inter-district clearings.
Inter-district clearings should be undertaken very soon after
the inauguration of the plan herein outlined.
Checks and drafts on
member banks in other Federal Reserve Districts should be taken on the
basis of the transit time between the Federal Reserve Cities plus the
average transit time between the Federal Reserve Bank of the paying
district and the member banks upon whom the checks are drawn.
Drafts
on Federal Reserve Banks should be credited immediately at par. This
may appear to be a disregard of the problem of float, but when it is
considered that each Federal Reserve Bank has a heavy deposit in the
Gold Settlement Fund and that the acquisition by one Federal Reserve
Bank of a draft on another Federal Reserve Bank gives control of a
933
n
«,
5^6
©*
corresponding portion of the Gold Settlement Fund, it is apparent that
drafts should he regarded as cash by all Federal Reserve Banks.
In
order to -make this as apparent as possible daily settlements should be
at once adopted on the basis suggested in the report of the Preliminary
Organization Committee and more lately by Mr. W* E. Cadwallader. The
credit
effect of making such drafts acceptable for ipmediate/at par by all
Federal Reserve Banks will be to give them currency and make them the
preferred form of remittance within the United States.
Thio will of
course be of advantage to the Federal Reserve Banks in many ways, one
of which will be that there will at all times be a large credit float
in the form of drafts outstanding on Federal Reserve Bankj, which will
be more than sufficient to offset any possible burden of float which
might fall upon the Federal Reserve Banks by reason of cashing or
crediting immediately drafts drawn on each other.
The amount of
such drafts in transit from the drawing banks and not yet presented
to a Federal Reserve Bank would be always greater than the amount in
transit between the Federal Reserve Banks for the reason that the
time of such float would be at most the mailing time between the
Federal Reserve Cities concerned and would be further shortened by
offset, while the time required for drafts to reach Federal Reserve
Banks other than that upon which drawn v\rould be at least the mailing
time between the districts involved and usually longer.
3/21/16.
924
5bo -f
PLAN
N 0 . I
MEMORANDUM AND SUGGESTIONS ON THE SUBJECT OF BANK RESERVES
AND THEIR RELATION TO THE SUBJECT OF THE
CLEARING AND COLLECTION OF CHECKS
(Submitted by Mr. Frederic H. Curtiss, of Boston)
Under date of March 2S, 19It *
The reserve of a "bank is that percentage of its deposits that
it should carry uninvested to meet the demands of its depositors.
There axe tiro kinds of reserve; nornan reserve, and excess or in
surance reserve.
The normal reserve of a bank should be based on
the maximum demand of its depositors in normal times.
An excess or
insurance reserve is the reserve set aside tc meet abnormal or un
usual demands; that is a sort of insurance fund.
Reserves should bo real; that is, cash in a bank’s own vaults
or a deposit in a Federal Reserve Bank.
The character of the de
posits of a bank varies the percentage of reserve needed.
The
character of a. bank’s deposits are as follows:
Savings accounts; - require small reserve,
Individual or personal accounts; - require a higher reserve than
the preceding,
Commercial accounts; - require a higher reserve than the preceding
Bank accounts; »
”
"
!>
”
11
■ ’’
There are two kinds of normal reserve:
1.
2.
To meet ordinary counter demands,
Reserves tc be carried at an exchange center to furnish
exchange to its depositors, either in the form of checks
drawn by the bank on that center, or by exchange created
by customers sending their own checks afar.
As icr the reserve for counter purposes,, a bank can gauge its
own counter demands and can be trusted to keep cash on hand to meet
them.
The reserve to be kept elsewhere must be proportionate to its
exchange transactions; that is, either the demand of its customers
for checks on an exchange center (e.g. Federal Reserve city) to be
used in paying bills elsewhere, or exchange created by its customers
through paying bills elsewhere with their own checks.
This outside
reserve, therefore, pertains chiefly to two kinds of bank deposits;
viz., commercial and bank.
The excess reserve, that is, the reserve
for insurance purposes should be held in a Federal Reserve Bank and
should be based on all the demand deposits of a bank and the per
centage, therefore, should be based somewhat upon the character of
the city or town in which the bank is located.
In connection with the composite plan of clearing (i.e. Plan 4)
the following problems arise.
1.
2.
3.
4.
1.
The figuring of reserves,
Those arising from deferred credit and debit,
Charges for service and exchange,
The handling of checks on non-member banks.
The figurine of reserve.
Although this plan by direct routing of checks originating
^putbic^a of the district, will materially reduce the float on those
bhe country bank will never be satisfied to maintain its re
serve on a deferred basis plan, and besides, the bookkeeping called
for is too intricate for the country bank; hence we roust make up out
926
-586-f-
- 3 our minds to allow country bank3 to figure their reserve as they do
now, from their o-wn books.
By so doing, the reserve bank will re
ceive additional balances from the outstanding checks drawn by the
country bank on it, and by time items which it has collected and
\
credited, and which the country bank will not debit on its books
until advice is received.
It will be the duty of the Comptroller
of the Currency to see that every member bank maintains its re
serves by its own books up to the ‘
requirements of the legal min
imum*
On the other hand, the member bank, both in the Federal
Reserve city and elsewhere in the district, must carry its ''excess?
legal reserve with the Federal Reserve Bank of its district, this
reserve account being figured from the books of the Federal Reserve
Bank, the member banks being obliged each week to send in a state
ment of their net liabilities so that each Federal Reserve Bank can
see that the proportion of reserve is maintained.
In other words,
this is, as we have said, in the nature of an insurance fund and
this reserve the Federal Reserve Bank must 3ee is maintained.
2.
Those arising from deferred credit
and debit.
In the case of immediate credit and immediate debit: we
are troubled with:
a.
b.
The question of overdrafts,
The question of float.
In this connection it is to be noted that the overdraft
and float are analogous when taken as a whole and not as they per
tain to the individual bank.
On the other hand deferred debits and
credits involve complications distasteful to small banks.
It has been customary,, under the note circulating system
to require a redemption fund at some central point to take care of
notes circulating throughout the country, as, for instance, under
the National Bank Act the 5fo redemption fund in Washington.
The
circulating of bank notes is similar to that of bank checks except
the latter circulate faster, and, therefore, requirs a larger re
demption fund.
If w 3 f'an cause each bank outside of a reserve city to
maintain a redemption fund proportionate to what is ascertained to
be its normal clearings, we shall have solved the problem.
of these funds will readily take care of the float.
plish our purpose if we allow member banks
The total
We can accom
interest on excess
balances> a rat? lower than the going rate allowed on bank balances,
and which would, therefore, induce the country banks to transfer
their surplus balances to the city banks, at the same,'time charging
2$ interest on current overdrafts, current overdrafts being for the
day's business, and charging one-half of cno per cent above the cur
rent bank rate or. overdrafts that a bank has had time to cover. This
excess reserve which serves as a x-edemption fund, will only pertain
to banks outside the Federal Reserve cities, and would be for clear-
i-
c;$7„
ing purposes, v.- 11.. banks ir- the Federal Reserve cities would be
enabled to make good their clearings by cash in their own vault?
or by buying ana selling exchange, or by rediscounts with the Fed
eral Reserve Bank.
3.
Charges for service and exchange.
It is proposed that Federal Reserve Banks, shall handle all
member checks at par, each member bank being charged a rate per item
based on the cost of the collection department of each Federal Reserve
Bank, but on some general rule to be promulgated by the Federal Reserve
Board.
Under the Federal Reserve System the cost of exchange is re
duced to a minimum; members of a Federal Reserve Bank are able to
create exchange by rediscounts with its own Federal Reserve Bank and
such exchange will to current throughout the United States.
In this
connection it may be necessary to differentiate between drafts on
a Federal Reserve Bank and exchange transactions.
That certain small
country banks are living off the exchange charged on their own checks
does not appear fair.
An exchange charge, if one is made should be
t
assessed against the drawer; nor maker of the check and not the receiver
and depositor of a check.
Furthermore, it should be against public
policy to allow a collection charge to be made by a member bank against
its own checks,
4.
The handling of checks drawn on
non-member banks.
There is no reason why the Federal Reserve Banks should not
agree at the outset to accept non-member checks on all Federal Re
serve cities on terms similar to checks on member banks in Federal
Reserve cities, for those checks can be presented at the counter.
Checks within the district on non-member banks remitting at par to
the Federal Reserve Bank should be handled on a deferred basis sim
ilarly to member checks on other districts and here again a member
bank might send those checks to the Federal Reserve Bank of its own
district,,giving immediate credit on its own books and count then
as reserve, the Federal Reserve Bank handling this item similarly
to items on other districts.
Checks on non-member banks in other districts, .outside of
Federal Reserve cities should be forwarded through the Federal Re
serve Bank of the District of origin only as collection itetw for
deferred credit.
In connection with the handling of non-member checks within
the district on certain specifiedypoints, arrangements might be made,
•where the trend of exchange warrants it, that non-member checks might
be cleared through specified member banks; that is, charged to the
account of a member bank and forwarded for presentation and collec
tion by the member bank.
B00KKEEPIH3 UDDER THE COMPOSITE P L M .
(PlInT)
1. Record books of member banks,
2. Record books of Federal Reserve Banks.
It is proposed that each member bank shall keep only one
account on its ‘books with the Federal Reserve Bank, as it does now
with it3 city correspondent, debiting at once to that account all
cash items that it sends for collection whether to its own or to
other Federal Reserve Banks, and debiting time items only when ad
vised of their payment by its Federal Reserve Bank.
The member
bank will figure its reserves, therefore, from its own books on
the basis of this account.
On the other hand, the Federal Reserve Bank shaj.1 main
tain two accounts with each member bank, the reserve account and
the exchange redemption account.
The reserve account will be
comparatively inactive and will be adjusted either weekly or monthly
as a member bank's net deposits increase or decrease, the account
to be based on the average for the preceding period.
The exchange or redemption account will be maintained
only by banks outside of Federal Reserve cities, (banks in the Fed
eral Reserve cities being able to redeem or settle for their checks
by cash from their own vaults or through the sale of exchange or the
making of rediscounts.)
This exchange or redemption account will be
the active account which the member bank outside of the reserve city
will draw against; to which cash items within the district will be
credited upon receipt; and cash items drawn on other districts and
time items will be credited when paid.
This account will be credited
with interest on balances and charged interest on overdrafts irre
spective of the reserve account.
be sent daily to the member bank.
A statement of this account will
931
-53 6-;..
S U P P L E M E N T
ARY
An arrangement might be made with non-member banks along
the following linos:
1.
Non-ipember banks might be permitted to have their checks
redeemed or settled for by a member bank in a Federal Reserve
city, on a plan similar to that of member banks ir. Federal
Reserve cities.
2.
We might allow such non-member banks to print some
statement or announcement that their checks were handled
with Federal Reserve Banks without charge for exchange.
3.
We might restrict member banks ir. the Federal Reserve
cities
.handling of non-member bank checks through the
Federal Reserve Banks only to the check of banks which have
agreed to this redemption plain,, endorsing or stamping on
the checks some device stating that fact.
932
5 S6
PLAN
NO.
- g
8
SUGGESTIONS SUBMITTED BY THE GOVERNOR OF THE FEDERAL RESERVE
BANK OF ATLANTA, UNDER DATE OF MARCH 2k, 1916,
FOR THE CLEARING AND COLLECTION OF CHECKS-
FIRST:
I would suggest that the officers of the Federal. Reserve Banks
he authorized to inaugurate a clearing house, which I believe they have
a right to do on the approval of your Board, as set forth in Section l6
of the Federal Reserve Act.
I also note that the cost of operating a
clearing house under these conditions, can be charged into expenses
against the banks using the clearing house.
SECOND:
I suggest that credits be deferred for two days within each
of the Federal Reserve districts for checks collectible in the district
and deposited by the member banks; and that from four to six days be
allowed as deferred payment for chocks payable in the other Federal Re
serve Bank districts, according to distance.
THIRD:
That an Inter-District system be created between the Federal
Reserve Banks similar to the clearings now taking place in the gold fund.
FOURTH:
That the Federal Reserve Bank be permitted to receive on the
endorsement of the member banks, checks on State banks, private banks,
savings banks and trust companies, as ,/ell as on their member banks,
which I think is covered by open market transactions, as set forth in
Section lU.
933
■' L
-
2
536
-
FIFTH:
That the Federal Reserve Board establish a zone system as to
the allowance for exchanges, and for the experimental stage, would
suggest the following:
On checks drawn on hanks in towns or cities up to 3,000 in
habitants, according to the last census of the United States, and to
be changed at each census period, that the bank to viiom these checks
are sent for collection be permitted to charge l/S of 1$ for the re
mittance of such items.
(My conclusions for this arbitrary stand, is
that the National Bank Act permits banks to be organized in places of
this size with a capital of $2 5 ,0 0 0 , and this size bank is dependent
largely upon collection charges on checks to sustain their expense
account.)* m
On all towns or cities, subject to the same rule of the
census, of 3,000 up to 10,000 inhabitants, the banks be permitted to
charge l/lO of 1^ for remittances and collections.
That banks in all towns or cities of 10,000 up to 25,000
inhabitants be permitted te charge
50#
per $1,000 on all collections a
and remittances.
That all towns or cities above 25,000 inhabitants collect
checks at par.
That the Reserve Bank be authorized to charge the depositing
bank the cost of exchange as above referred.
That in the event no member bank is located in a town or city,
then the Reserve Bank may choose a State bank, trust company, savings
bank or private bank, located in that town, to whom it may send the items
- g.
934
- 3 -
586 - g.
drawn on that town,, provided said "bank will agree to collect at the
said rate.
In the event no bank not a member, be willing to collect
at these rates, then the postmaster in that town be authorised to col
lect these checks, deducting as remuneration the same fee as would be
allowed to the member bank thus located.
SIXTH:
That the overhead cost of collecting these items be deter■J
mined by two units;
one unit to be the aggregation of the total face
value of the items handled, and the other unit to be for the number of
items handled.
An equalization between these two should determine the
charges .to be made for this service.
SEVENTH: *
That the Federal Reserve Bank should determine when the item
had reached its maturity of deferred payment, and immediately credit
the same into the reserve account of the member bank thus producing
the credit, and correspondingly charge transit account with the same.
EIGHTH:
That the Federal Reserve Bank shall not be responsible for the
loss arising from any item, and shall not be held responsible until it
has received ultimate final payment for said item.
U/6/16
935
536 - h.
PLA N
N 0 .
.2
PLAN SUBMITTED BY MR. GEORGE 0. BQRDWELL, CASHIER OF THE
FEDERAL RESERVE BANK OF SAN FRANCISCO, UNDER DATE
OF MARCH 2U, 1$ l6,
for the
CLEARING AND COLLECTION OF CHECKS, WITH IMMEDIATE
CREDIT AND DEFERRED DEBIT PROTECTED BY
INTEREST CHARGE ON FLOAT.
Federal Reserve Bank to receive, for immediate credit and deferred deb.it checks and drafts upon any member bank or non-member bank
(Federal Reserve Bank carries member banks’ Transit
Account but is protected by deposit of optional
reserves)
Interest charge at higher than 30-day discount rate to be made
to depositing banks on amount of outstanding items minus
excess of reserve deposits over required reserve deposits
(Member bank carrying with Federal Reserve Bank
excess deposits equal to full amount of float
pays no interest)
Time schedule for interest charge to cover average time by States,
"San Francisco, immediate, California three days, Oregon
five days, . . . .
etc........
(Great advantage to San Francisco Banks)
Exchange paid by Federal Reserve Bank to be debited back to
depositing banks.
Transportation charges to be paid by Federal Reserve Bank on
shipments to cover excess collections forwarded by Federal
Reserve Bank to banks which remit at par.
Service charge
on interdistrict cash items
say £0^ per $1,000
on intradistrict. .c&sh items
rate based on actual cost in-
936
_ 2 -
5^6 - h.
eluding transportation charges,
not retroactive.
say \§<? per item
on collections - - —
(Reduction of cost to member banks in operation of
their Transit departments should largely offset
total service charges)
Transfer drafts and special items
received for deferred credit.
The plan suggested will:
make it advantageous for member banks now collecting own out-of-town
items to deposit them with Federal Reserve Bank
(see illustration)
make it practicable for all member banks to route items through
Federal Reserve Bank
permit banks to control their balances
give incentive to carry excess balances with Federal Reserve Bank,
at least to the extent of optional reserves which in amount ap
proximate estimated float
protect Federal Reserve Bank from extensive involuntary loans
through check collections.
ILLUSTRATION:
(applicable November 191? to member banks now collecting
own items)
A member bank now handles $'4,030,000 cut-of-town items in one month;
California $3*000,000;
Oregon $500,000;
Washington $450,000;
outstanding 3.» 5 and 7 days respectively
Average items outstanding - - —
- - Reserve requirements now reduced by
deducting float from-bank deposits - - - - $75,000
Required reserve deposits - - - - -
$505*000
600,000
- 3-
586 - h.
Optional reserve deposits - - - - - - - —
Reserve requirements to cover $LOO,O0O increase
in net bank deposits would be increased - - -
boo,ooo
6 0 ,0 0 0
Total unproductive funds, member bank collecting
own items - —
1 ,5 0 5 ,0 0 0
9 0 -day discount rate - - - - - - - —
- Rate of interest charge on collections---- 6 fp
WITH FEDERAL RESERVE BANK COLLECTING ALL ITEMS:
Unproductive funds reduced to —
—
- - - —
If only minimum balance maintained,
interest charge - - - —
- - - - —
If balance increased by deposit of
optional reserves
interest charge ~
■
—
- - —
—
1 ,0 6 0 , 0 0 0
-
-
- -
If additional deposit maintained of $105,000
interest charge - .—
- - - —
- - —
- unproductive funds - - - - - - - - —
- -
2,735
569
none
Gain in loanable funds through Federal Reserve Bank
collecting items - - - - - - - - - - - - - -
165*090
3U0,000
RESULTS:
Member bank, by routing items through Federal Reserve Bankj.
increases loanable funds $3 ^0 , 0 0 0
at same time, avoids interest charge of $2 ,1 6 6 by depositing
with Federal' Reserve Bank optional reserves otherwise unpro
ductive,
at same time, avoids interest charge of $569 through excess
deposit of $1 0 5 ,0 0 0 to cover remaining items,
(this deposit only necessary when float exceeds optional reserve)
is encouraged by lower discount rate to borrow by rediscounting
rather than through failure to maintain latter deposit.
938
- u-
586 - h.
DEFINITION;
Plan I
"
w
"
"
*'
”
2
2a
3
3a
3b
U
Proposed by Federal Reserve
Agents
Optional
Proposed "by Governors
Mandatory
Deterred credit and deferred debit
Now partially operated in
District 12
Optional
Deferred credit and deferred debit
Proposed by Messrs.
Rowe & Davis
Mandatory
Immediate credit and immediate debit
Now partially operated in
District 10
Mandatory
Immediate credit and immediate debit
Now partially operated in
Districts
Optional
$
Composite of suggestions
Mandatory
"
"
*
5
$
7
Deferred credit and deferred debit
with option of immediate credit
and immediate debit.
Now partially operated in
District 11
Proposed by Ray H. Gidney
Mandatory
Proposed by Geo. 0. Bordwell
4/7/16
Immediate credit and immediate debit
Deferred credit and deferred debit
limited to one-way time for
points more than one day distant
Immediate offset for each bank’s
incoming and outgoing items with
deferred credit and deferred debife
for resultant balances
Deferred credit and deferred debit
with float pro-rated and loans
authorized at current discount
rate
Immediate credit and deferred debit
protected by interest charge.
-
5
-
5S6 - h,
ITEMS HANDLED:
1 proposes to handle a p o rtio n of items on member banks and a l l
on S ta te hanks;
2 , 3 a, U & 5 p rovid e fo r h a n d lin g item s on a l l member banks;
2a & 3b p rovide f o r h a n d lin g a p o rtio n of the member bank item s;
3
.’proposes to handle a l l member bank and some S ta te bank item s;
but to make d isc r im in a to ry charges a g a in s t S ta te bank checks>
6 proposes to handle a l l member bank and some S ta te bank item s;
7 proposes to handle a l l item s.
THE FLOAT:
1
2 & 2a
3,
3a & 3b
le av e s burden w ith d e p o sitin g banks* except when immediate
c r e d it and debit a v a ile d of;
leave
burden w ith d e p o sitin g banks;
attempt to pass burden to drawee banks;
a c tu a l r e s u lt s :
O ve rd ra fts and depleted b a lan ce s a t
Federal Reserve Banks;
1+ le a v e s burden w ith d e p o sitin g banks fo r one day item s and
w ith Federal Reserve Bank or drawee banks fo r retu rn
t r i p on more d is ta n t item s; "
5
d is t r ib u t e s burden in u n c e rta in and c o n sta n tly v a ry in g pro
p o rtio n s between endorser banks, drawee banks and other
banks which are n e ith e r endorsers nor drawees;
6
attem pts tc p ro -ra te to d e p o sitin g and drawee banks with
perm it to withdraw p ro -ra te d average o u tsta n d in g funds
a t current d iscou nt ra te s;
7
p la c e s r e s p o n s ib ilit y d ire c t upon F e d e ral Reserve Bank but
o ffe r s d e p o sitin g banks e ffe c t iv e inducement to ca rry
excess d e n o sits to cover.
CONTROL OF BALANCES;
.1, 2, 2a & 7 perm it member bank3 to c o n tr o l t h e ir balances;
3; 3®1 & 3b do n o t g iv e member banks c o n tr o l of t h e ir balances;
k, $ & 6
http://fraser.stlouisfed.org/
r
Federal Reserve Bank of St. Louis
g iv e member banks o n ly p a r t i a l c o n tro l of t h e ir balances;
840
-
’
h
6
-
5 S6
- h
EXCHANGE CHARGES:
'i
on member bank:iw;less to discuss pending legal'decision or
checks :
legislation either requiring drawees to cover
at par or authorizing exchange debited back
to depositing banks1 accounts;
8n State bank
plans 3 and S propose flat rate to be paid all
checks :
drawee banks to debit of depositing banks’
accounts
plan 7 leaves open question of paying exchange
but provides for debit to depositing banks1
accounts for such exchange as may be paid-
941
586 - i
A
M E M O R A N D U M
TO THE GOVERNORS OF THE FEDERAL RESERVE BANKS
by F. A. Delano.
W ashington,. A p r il
7,
1916.
A ge n e ral statement of the reasons why the time has ccrae
fo r the F e d e ra l Reserve Board to put in to e ffe c t a check
c le a r in g system which, even i f not complete to s t a r t w ith
s h a l l be the foundation of a stru c tu re which may be com
pleted w ith reasonable d isp a tch and which, w hile not re
q u ir in g member banks to a v a i l themselves of the new f a c i l
i t i e s , w i l l g iv e the p r iv ile g e to every member bank th a t
w ishes to make use of them.
F IR S T :
I t i s very evident th at the F ederal Reserve Law, w hile not ab
s o lu t e ly mandatory, or e n t ir e ly s p e c if ic in i t s requirem ents about
c le a r in g , c e r t a in ly contemplates th a t the Board s h a ll e s t a b lis h a
check c le a r in g and c o lle c t io n system, which s h a l l include i n i t s ad
herents a l l member banks, and fu r n is h an e ffe c t iv e c o lle c t io n agency
fo r checks drawn on member banks in a l l d i s t r i c t s .
SECOND:
The s h i f t i n g of reserves from banks in reserve and c e n tr a l re
serve c i t i e s to F ederal Reserve Banks would, i n e ffe c t , deprive many
banks in the country of o p p o rtu n itie s fo r check c le a r in g and c o lle c t io n
which they have h eretofore enjoyed.
The fram ers of the F e d e ra l Reserve
Act, h av in g t h i s in mind, saw th a t they must create a machinery to per
form the fu n c tio n s which correspondent banks had p re v io u s ly performed
in retu rn f o r bank balances.
THIRD:
The criticism is made that, whereas, hanks in central reserve
and reserve cities have in the past carried the reserve balances of
their client banks, have paid interest on those balances, and rend
ered important services in the matter of check collection and clear
ing, and in other ways as well, it is strange that the Federal Re
serve Banks, which pay no interest on reserve deposits, hesitate to
perform this service cn the score cf expense-
Hesitation to assume
clearing and check collection functions is the more strange because
of the fact that the strategic position of the Federal Reserve Banks
is such as to make it possible for them to handle this business at
a much lower cost than it can be handled under present conditions and
.with present methods.
The additional expense which such operations
will entail to the Federal Reserve Banks has doubtless been over
estimated and it may well be pointed out that as the overhead ex
pense is already largely provided, the additional expense will be
mainly mechanical and clerical, and therefore moderate and propor
tional to the volume of the checks handledFOURTH:
With each successive transfer of reserves (the complete transfer
having already been made in central reserve cities and the final pay
ments -as to reserve cities being due in May, 1J17, and in non-reserve
cities in November, 1917), there is increase-, necessity and demand
for a complete and satisfactory clearing system.
ip./ % f?
536
- 3 FIFTH;
In discussing the clearing system, reference has been made
frequently to various evils in banking practice which have grown
up in the past fifty or more years; for example, the common prac
tice by banks in central reserve and reserve cities allowing im
mediate credit and deferred debit on country bank items; or the
practice whereby exchange charges are assessed against the depos
itor or indorser of the check, rather than the drawer or maker.
These and other practices which might be mentioned, all more or
less vicious in character, should be corrected, and doubtless will
be corrected or modified in future years; but it certainly woul^
be unwise
to undertake too many reforms simultaneously or impose
upon any proposed check clearing plan the burden of all the de
sirable reforms.
Doubtless we can check some of these evil
practices now, can reduce "float" by more direct routing of items,
and build up a machine which will be able gradually to effect other
reforms, but we must not attempt to do it all at onco.
SIXTH;
An important feature in the development of American banking in
the last two generations has been the development of book credits in
the form of deposits, rather than note issues.
European baulks, and
especially those of continental Europe., give credit tc a borrower in
the form of bank notes.
In the United States the extension of credits,
has taken the form chiefly of book ere fits.
The immense system of
526 - i .
4 -
State banks and trust companies which has developed so phenominally
in late years has long been denied note issuing powers, and even
the national banks use the note issuing power tc only a relatively
small extent.
Hence, it is a mistake to assume that the chief function of the
Federal Reserve Banks is to be that of note issuing.
On the con
trary, it is but fair to expect that as the years roll by their more
important functions will be the extension of book credits to their
members and currency only In crop moving seasons or in times of
stress.
But member banks will net go to the Federal Reserve Balks
for book credits or balances in excess of legal minimums unless
these balances can be ci some service to them.
If there is no check
clearing system - if there is no system by which they can issue
drafts drawn on Federal Reserve Banks, or send them to their cor
respondents, they will not cars to avail themselves of these credits.
This character of service m i l bring the member banks and the Reserve
Banks in daily contact, whereas, the note issuing feature vail only
bring that contact at rare intervals.
Hence, it may be fairly said that the success and development
of the Federal Reserve System depends quite as much an a good system
of check clearing as on any other single feature.
4/7/15.
O/J
m3L5
586 - j.
P L A II
HO.
1 0 .
A CLEARING AND COLLECTION PLAN
Being an Evolution of the plan aubmitted by Mr. Lyman H. Talley
(Proposed by Mr. 1,1. 1. Fleming., Assistant Cashier, Federal
Reserve Bank of Cleveland, under date of April 7, 1916)
For the utmost possible development of the check as a medium of
exchange, it is obviously essential to cure the serious evils which
have grown into the present methods of check collection.
Four pur
poses must be sought:
1:
Minimize the life of the check;
2:
Minimise the volume of "float” carried by the banks,
especially that large part which is now fallaciously
and dangerously counted as reserves;
3:
Minimize the cost of collection, and eliminate exchange
charges;
4:
Place the cost of the service where it belongs.
The plan of deferring debits and credits by schedules will
shorten the life of the average chock, and will greatly reduce the
float, byt will leave a, considerable volume of float to be carried
by the Federal Reserve Banks.
Its principal objection, however,
is that it would be a radical reform, strange and novel, necessarily
compulsory, and therefore unwelcome, and so it might drive member
banks out of the system.
It will be acknowledged that the application of the clearing
house principle would be the ideal solution cf the problem if it is
practicable and that clearing house operations could accomplish all
Q/'ifR
%U} '■
586
- 2 -
the purposes above named.
]•
The Act recognises the clearing house
principle in terns; and a country-wide clearing house being obvi
ously impracticable provides that the Federal Reserve Board "may
require each Federal reserve bank to exercise the functions of a
Clearing House for its member banks."
The plan herein proposed is an evolution of the "Reserve City
Clearing House" as now operated in the Dallas district.
all of. thfe "Outline of Fundamental Principles"
Practically
submitted by Governor
Van Zandt is applicable tc this plan which therefore has the merits so
well urged therein for Mr. Talley's plan; so it is unnecessary to re
peat herein the fundamental principles of that plan, which are (without
leave) "hereby made a part of this report."
The features now proposed
to supplement or modify the Talley Plan are a3 follows:
1.
All Clearing House membership being essentially voluntary,
member banks should be given the option of joining the Federal Reserve
Bank Clearing Houses or accepting deferred credit and debit.
2.
The Clearing House Departments of Federal Reserve Banks
should be entirely independent of the Reserve Banks themselves; that
is, the reserve accounts of member banks should be kept- entirely dis
tinct from the Clearing House accounts.
Credit, balances in the
Clearing House when collected from debtor banks should however be
deposited to the credit of the member bank la reserve account in the
Federal Reserve Bank.
Debtor banks should settle for debit balances
by drafts on the Federal Reserve Ban> to the order of the Clearing
House department or manager, ah provided in the Talley Plan.
586 -
3
A debtor bank obliged to ship currency tc meet its settlement
draft should be credited with the actual minimum cost of such ship
ment, as in the Dallas system; but it is believed that such cost
should be charged to the general operating expense, rather than to
attempt to charge it against the banks clearing itoms on the ship
ping bank, which would involve much clerical work.
3:
Each 'Federal Reserve District should be divided into a
suitable number of sub-districts for clearing house purposes only;
each such sub-district to contain a Clearing House Agency of the Fed
eral Reserve Bank.
Each such Clearing House Agency should be a member
cf each other Clearing House Agency in the sam® Federal Reserve Dis
trict*
Each member bank should send all itarns on other member banks
located within its oub-distriat to the Clearing House Agency thereof,
and should send all items on member banks of other sub-districts within
the same Federal Reserve District, direct to the Clearing House Agency
of the sub-district in which the payer bank is located, with a du
plicate letter to its own Clearing House Agency.
This Agency
being a member of all other Clearing House Agencies in the Federal
Reserve District, receives credit on the clearing sheet of the payer
bank’s Clearing House Agency, and its balances will be offset in the
same manner as balances between other members of that Clearing House
Agency.
All balances, however, should bo settled on the books of
the Central Clearing House at the Federal Reserve Bank; and there the
offsets will probably be -such as to coviaio the necessity of appor
tioning credits as in the Talley Flan.
Resultant balances between
j.
948
- 4 -
586 -
the several agencies would also he settled through the Central Clearing
House Department at the Federal Reserve Bank.
4:
Items of non-member banks may be cleared through member banks,
as is now the custom in some, local Clearing Houses*
For the service
of clearing or collecting items presented by member banks, but bear
ing the indorsement of non-member banks, an additional discriminatory
charge should be made.
.INTER-DISTRICT OPERATIONS
5:
The handling of checks payable outside of the Federal Re
serve District of the depositing bank, although involving deferred
settlements, can be conducted in a similar manner.
Member banks
having items payable outside of their own Federal Reserve District
could send all such items direct to the Clearing House Department
of the Federal Reserve Bank of the district in which the payer bank
is located, or to its sub-district Clearing House Agency; or to the
payer bank direct if located in a center, but in each case for credit
of the Clearing House Department of their own Federal Reserve Bank;
at the same time sending duplicates of such letters to the Clearing
House Department of their own Federal Reserve Bank.
The payer
bank’s Federal Reserve Bank will then advise the depositing bank’s
Federal Reserve Bank.
A bank having a small number of items pay
able in other Federal Reserve Districts might be permitted to send
all such items to its own Federal Reserve Bank for sorting and trans
mission, although each member bank should be urged to send items
j.
r5-
{ 949
-586 - j-
direct to the district where payable whenever possible to avoid delay
in transit-
Resultant debit or credit balances in the Inter-district
system should be settled in the same manner as those in the Intra
district Clearing House with the exception that they would be cleared
through the Gold Settlement Fund.
EXPENSE OF OPERATION.
6:
The expense of maintenance and operation may be provided
for as suggested in the Talley Plan as far as Intra-district clear
ings.are concerned.
In Inter-district operations a Federal Reserve
Bank Clearing House receiving items from banks in other Federal Re
serve districts direct should not enter any item charges upon its
books, but the Federal Reserve Bank of the District where such items
originate should make an item charge from the duplicate letter of
advice received by it from its member bank which has sent the items
to the other Federal Reserve District.
The item charge for both Intra and Inter-district
items should, of course, be sufficient to cover all incidental ex
penses, including any necessary remittances of funds.
U/7/lS
950
586 - k.
PLAN
II 0 .
1 1 ■
FEDERAL RESERVE BARK OF ST. LOUIS.
PLAN FOR THE COLLECTION OF CHECKS IS INTENDED TO SHOW:
THE FOLLOWING
WHAT WE BELIEVE SHOULD BE DONE;
THE REASONS WHY WE BELIEVE SC;
AND THE METHODS PROPOSED TO ACCOMPLISH IT.
FUNDAMENTALS:
REASONS:
METHODS:
1 - All member banks
should receive at par
checks drawn on them,
which have been deposited in the Federal
Reserve Banks.
This
should be mandatory.
This is based upon the last two para
graphs in Sec. 16 of the Federal Re
serve Act.
It should be put in
to effect by orders
issued by the Fed
eral Reserve Board.
2 - The Inter-Dis
trict exchange of
checks should be put
into,effect simulta
neously with the man
datory collection of
checks on members.
Any practical method of collecting
checks must include means for the
passing of a check from the Dis
trict where it is negotiated to the
District where it is payable.
Federal Reserve Banks
shall receive for
credit from other
Federal Reserve Banks
checks drawn on
points in the form
er Banks' Districts
Further details are
given under Sec; 6 .
3 - Federal Reserve
Banks should receive
from Member Banks,
and other Federal Re
serve Banks checks
drawn on Non-member
banks, on the basis
of the exchange cost
on such checks.
Recognition must be given to con
ditions actually existing.
The
National Banks are now handling
75$; to 80$ of the country checks in
circulation, consisting of checks
on Members and on Non-member banks.
The checks on Members will be turned
into the Federal Reserve Banks, who
will therefore accumulate 75 to 80)6
of the checks drawn on their members;
and the members will have to provide
payment for them to the Federal Re
serve Banks.
Some assistance should
be given to the Country Member to
restore its reserve balances thus
depleted by the Federal Reserve Bank.
i
A start can be made
by collecting checks
on non-members lo
cated in the same
place as a member at par if possible,
at a slight service
cost if necessary.
The Federal Reserve
Bank will then begin
negotiations with
non-members located
in places where
there are no members
for the collection
of checks on such
o f-i-f
- 2
FUNDAMENTALS-:
REASONS:
3 - (Continued)
Owing to the greater number of State
Banks, the outside chocks received by
a country member are mostly drawn on
State Banks in the- vicinity.
Some
are drawn on National Banks, which
can of course be sent to the Federal
Reserve Bank, but these do not by any
means provide a fair offset to the
payments the country member has to
make to the Federal Reserve Bank. To
say to the country member bank that
it can restore its depleted balance
by sending a check on its City cor
respondent is to say: "We leave you
whore we found you, and you must find
the means to offset a situation cre
ated by the Federal Reserve Bank."
The equitable way is for the Federal
Reserve Bank to provide the member
bank with the means to convert all
of its outside checks into a credit
balance in the Federal Reserve Bank,
at a minimum expense to all concerned.
The collection of country checks will
not in practice prove to be such a
tremendous country-wide affair as
first appears.
The outside checks
received by a country bank are largely drawn on banks in its vicinity
and by far the larger part of them
would not go outside of the Reserve
District in which Vie Member is lo
cated if the Federal Reserve Bank
undertakes their collection, ai.d
declines to receive from
another Federal Reserve Bank checks
already endorsed by a bank located
in the district of the receiving
Federal Reserve Bank.
The collec
tion of country checks will resolve
itself into a local proposition.
4 - The Federal Re
serve Banks should
differentiate between
Non-member banks who
remit at par for
checks sent thorn by
Federal Reserve Banks
and those who charge.
Under any comprehensive plan of col
lecting country checks a Non-member
can receive by virtue ox a. connection
with its City correspondent all of
tfce' advantages of the collection fa
cilities of the twelve Federal Re
serve Banks.
Unless some' distinc
tion is drawn between the Non-member
586 - k.
METHODS:
banks, on as favorable
terms as possible, in
exchange which is con
venient tc the remit
ting bank and convert
ible by the Federal
Reserve Bank4
Since
the twelve Federal
Reserve Banks will be
come the largest col
lectors of country
checks, they will se
cure the lowest rates
from the banks who
charge exchange. They
will be X+l pc3 ition
to offer certain ad
vantages tc non-mem
bers who retait at par,
as will be explained
in Section 4 4
The
manner of giving
credit to the sending
member bank for checks
on Non-members will
be explained further
on.
The differential
charge shall be the
same rate of exchange
which is charged by
the endorsing bank on
items sent it by the
Federal Reserve Bank.
The rate will be as-
- 3 -
FUNDAMENTALS;
REASONS:
4 - (Continued)
This should os a
who remits at par for the Federal
charge made on account Reserve Bank, and the one which will
of the endorsement cf
not, the latter bank receives an
a Non-member tank
undue advantage over the former and
which does net remit
al30 over Member Banks. A 'way
at par for the Fed
should oe found to equalize this
eral Reserve Bank.The
discrimination and offset the un
due advantage given the Ion-member
enforcement of the
who seeks to enjoy the facilities
differential charge
will be voluntary on
cf the federal Reserve Banks and
make
a profit from them at ens and
the part of the
the same time.
It is proposed
drawee bank, as ex
that the Federal Reserve Bank
plained in the reason
for levying the charge charge exchange cn any check, which
reaches it, that io endorsed,by a
Mon-Bomber who charges for remit
ting to the Federal Reserve Bank.
This differential charge shall be
at the same rate ci exchange as the
Non-member charges the Federal Reservo Bank. The exact amount of
this charge is to be paid to the
Bank cn which the check is drawn,
if the drawee bank remits at par
for checks sent it by the Federal
Reserve Bank.
It is apparent
that the Federal Reserve Banks can
by this means have a definite ad
vantage tc hold out ic the bank
who will remit to it at par.
It is true Member banks have been
urged to join the clearing system,
mow in use on the ground that they
can have their customers' checks
collected at par through the Fed
eral Reserve Bank.
This differ
ential charge will effect this to
a certain extent; but it will re
turn the Member Bank the exact
amount of the charge levied on its
cue tome rc* checks, putting it in
position to return it to the cus
tomer; OR,IF DESIRED BY THE MEMBER
BANK, nc differential will be im
posed on its customers' checks on
account of endorsemert, if it pre
fers this to being paid exchange on
them.
586 - k.
METHODS:
certained from the
negotiations to be
carried cn as ex
plained under Sec.3.
The charge is to be
levied against the
depositing member
bank.
The chatge
is to be levied by
the Federal Reserve
Bank in which the
item is first de
posited. The Fed
eral Reserve Bank
of the District will
know what banks in
its District are
charging exchange.
It is apparent that
the bulk of the out
side items endorsed
by these charge-banks
will be offered to
the Federal Reserve
Bank located in it3
District. (See last
paragraph in "Raisons"
Sec. 3). The amount
of the charge will be
noted on the letter
of transmittal carry
ing the item, from the
Federal Reserve Bank
tc the Member Bank
or another Federal
Reserve Bank. The
check charged on
will be indicated
by a symbol opposite
the check. A coupon
at the foot of the
letter will name the
amount cf the check
on which the’i n f e r
ential has been
levied, amount ox the
charge and contain
a request to deduct
- 4 FUNDAMENTALS:
4 - (Continued)
REASONS:
The bulk of the exchange charges on
checks is levied by country banks in
the smaller towns and cities. It is
no secret that the evil of exorbitant
exchange charges is rooted in the
competition of reserve city banks
for accounts of country banks. Ex
perience of the past twelve months
has demonstrated that little assist
ance can be expected from interests
outside of the banks in the solution
of this exchange problem. The first
step towards a solution must be
reached in the relations between a
country bank and its reserve city
correspondent. By imposing a dif
ferential charge on the checks,
which can be deposited in a Federal
Reserve Bank, the Reserve City bank
will soon have two plans which it
can extend to the country bank for
the handling of its items.
One
plan to the bank which remits at
par for the Federal Reserve Bank
(Whose items can be deposited
through a Member at par in the Fed
eral Reserve Bank) and a second
plan for the bank which charges the
Federal Reserve Bank and 'whose items
are therefore subject to a charge
if deposited in the Federal Reserve
Bank. The profits to the reserve
city bank will be quite different
on the first class from the profits
on the second class of accounts.
This wide difference in profits will
soon effect the basis upon which
the reserve city bank can receive
the country account.
Country banks will, by their own
volition, divide themselves into
two classes. Those banks, having
a large volume of outside checks
to collect, will manifestly find it
to their interest to par for the
Federal Reserve Bank, while those
having only a small volume of out-
586 - k.
METHODS:
the amount of it
from next remittance,
if the check is drawn
on a non-member who
pars; or if drawn
on a member the cou
pon will be an ad
vice o£ credit. If
the letter of trans
mittal is to another
Federal Reserve Bank,
the notation will be
an advice of credit
for the knount of
the differential.If
the check is drawn
on a Non-member who
charges the Federal
Reserve Bank, the
amount of the dif
ferential will be
retained by the Fed
eral Reserve Bank,
and used to reduce
the cost of check
collection.
Member banks will
be furnished with a
list of the banks
who charge the Fed
eral Reserve Bank,
so that they can
arrange accordingly
for handling items
with charge bank
endorsements. Federal
Reserve Banks will
not receive from
other Federal Re
serve Banks items
bearing the endorse
ment of member or
non-member banks, lo
cated in the second
Federal Reserve Banks'
District. All Fed
eral Reserve Banks
954
- 5 FUNDAMENTALS ♦
4 - (Continued)
REASONS:
586 k.
METHODS:
•side checks may prefer to charge tne
|Federal Reserve Bank and pay the
|same rate on the outside items £t
may receive from its customers.
'Eventually the number of banks
icharging exchange will be reduced
!to a minimum .
will exchange with
each other lists show
ing rates of exchange
paid to the various
non-member banks.
5 - The twelve Federal; This is following long osteblishod
Reserve Districts
|lines of practice in the collection
should be sub-divided ;of country checks. The commercial
and Sub-Agencios os- ibanks of tho country have found it
tablished for the col-jnecessary to distribute country
ion of checks in
checks through 50 to 60 centers*
the immediate v ic in it y ! Experience has developed tho neces
o f the Sub-Agency.
sity for thi3.
The Sub-Agencies
The d is t r ib u t io n o f
! should be so located that a majority
Sub-Agencie's should
j of the banking towns in the subbe so arranged th a t
district are within one day's time
the m a jo rity of bank from the Sub-Agency. This will en
in g p o in ts in the
able a remittance containing checks
Reserve D i s t r i c t are
on members to be credited the next
w it h in one day’ s time business day after receipt at the
from a Sub-Agency.
Sub-Agency, and enable remittances
of checks on Non-members to bs
credited two days after receipt at
the Sub-Agency.
The principal ar
gument advanced against the parring
of checks has been the coat to the
paying banks to make the exchange
in which it is required to remit.
If Sub-Agencies are properly lo
cated, banks remitting to them will
remit in exchange which they make
readily and which costs nothing.
Location of Sub*
Agencies shall be
designated by the Fed
eral Reservo Bank.
Tho Sub-Agencies may
bs Member Banks, but
the men handling the
items should be em
ployes of the Federal
Reserve Bank, under
proper bond. A list
of Sub-Agencies shall
be furnished member
banks in the district
with instructions to
send items in the SubDistrict to the SubAgency. Receipts at
each Sub-Agency may
be telegraphed if
necessary to the Fed
eral Reserve Bank,
and confirmed by mail.
The manner of entry
on the books of the
Member Bank of remit
tances sent to the
Sub-Agency is taken
up further on.
6 - Checks on Member
It is the purpose of this method to
Banks or Federal Re
enable X Bank to realize on a check
serve Banks should be drawn on Y Bank within the same
credited to tho send period that Y Bank can realize on
ing bank on the day
a check drawn on X Bank. It is in
the checks should
tended that a check drawn on a Mem
roach the drawee bank. ber Bank shall become reserve for
the sending bank on the day the
Checks on Non-Member
check reaches the drawee bank. The
banks should be
lending bank will accordingly charge
credited on the day
!the Federal Reserve Bank with re
returns for same
should reach the Fed- mittances sent it on the day such
Member Banks will be
furnished with forms
of remittance letters
which will show that
the letter is ad
dressed to a SubAgency, the Federal
Reserve Bank of its
district, or a Fed
eral Reserve Bank or
Sub-Agency outside of
it3 District.
f
FUNDAMENTALS:
6
-
6
t*
REASONS:
586 - k.
-
METHODS:
(C on tin ued)
era! Reserve Bank
collecting same.
remittances should, reach the drawee
hanks.
Its hooks will therefore
correspond with the hooks of the
Federal Reserve Bank .
■What is visually termed in transit
; matters "the float" is the volume
of checks which have been credited
to depositors* accounts and are in
process of collection.
It grows out
of the long established practice of
giving credit on receipt to a de
positor of checks on outside points.
Manifestly the crediting hank re
ceives some advantage in this manner
of handling outside items. It is
also plain that the drawee hank re
ceives some advantage from the cir
culation of its customers checks
drawn on it.
The above plan divides the burden
of this "float" equally between
the reoaiving bank and the drawee
bank.
It is proposed as being an
equitable division.
It is based on
the belief that a Federal Reserve
Bank can define when a Member Bank
may count as reserve any checks de
posited in the Federal Reserve Bank.
The form will show
when the Member Bank
is tc charge the re
mittance to the Fed
eral Reserve Bank.
It may charge checks
on the same city in
which.a Sub-Agency
of Federal Reserve
Bank is located to
its reserve account
one day after trans
mittal . Checkfe on
other members in the
District shall be
charged two days af
ter transmittal;
Checks on Non-Members
in the District may
be charged three
days after transmit
tal.
This will take Care
of the bulk of the
outside checks re
ceived by the aver
age country member.
Shere will remain
a small volume of
checks cn points
outside of the Dis
trict, which may be
sent to the Federal
Reserve Bank of the
member’s district
or by arrangement
to a Federal Reserve
Bank located in the
district where the
checks are payable.
It will not be dif
ficult to arrange
with the large col
lecting banks a
practical convenient
method for the hand
ling of chacks on
points outside of
their Vein—
Pare- —
7
FUNDAMENTALS:
6 - (Continued)
REASONS:
586 -
k
METHODS
a matter which must
be left to the dis
cretion of the Federal
Reserve Bank concerned.
Remittances containing
checks on non-members
shall be separated
from those containing
only checks on Members.
The exchange charges
if any on checks on
Non-Members will be
assessed the deposit*
ing bank on receipt
of the check, if with
in the District. If
the check is drawn on
a point Outside of
the district, the ex
change will ba as
sessed on receipt of
advice of the col
lecting Federal Re
serve Bank.
Exchange charges on
non-member checks
received from other
Federal Reserve Baucks
will be assessed on
receipt of the check,
from the known sche
dules of charges which
the Federal Reserve
Bank will have on
file from non-members
in its District.
Lists showing time in
transit will be fur
nished Members and
Federal Reserve Banks.
It is recommended
that the question be
taken up later for
adjustment, ae to
when drafts drawn by
a member bank on its
Federal Reserve Bank
shall be deducted
from the drawers bal
ance on its books.
si
- 8 -
FUNDAMENTALS:
7 - Currency or coin
shipments made by a
Member to a Federal
Reserve Bank shall
be at the expense of
the shipping bank,
but shall be counted
as reaerve on the
date the shipment is
made by the Member
Bank.
8 - Checks represent
ing transfers of fur.cfe
shall be received on
a basis to be fixed
by the Federal Reserve
Bank concerned.
5 - Reserves of Mem
ber Banks shill be
computed from the
books of the Federal
Reserve Bank.
10 - Settlements be
tween the Federal Re
serve Banks in the
Gold Fund should con
tinue as heretofore
until experience de
velops the necessity
for more frequent
REASONS:
jThe establishment of Sub-Agancies
will largely offset the need for
icurrency shipments for purposes of
|making exchange. They will thereifore be made principally as a mat!ter of convenience to the shipping
jbank. They should be counted as re
serve while in transit, 3 ince the
currency would probably be reserve,
had it remained in the pember's
vault,
This is to permit Federal Reserve
Banks to engage in the purchase or
sale of domestic exchange in ac
cordance with conditions existing
at the time of the transaction.
536 - k.
METHODS:
No details are needed.
The shipments will
simply be counted and
credited on receipt.
The manner of entry
of such transfer
checks is to be left
to the discretion of
the Federal Reserve
Bank concerned.
By direction of the
The carrying out of Section 6 will
enable the Member Banks to have their Federal Reserve
books agree with the Federal Reserve Board Member Banks
shall make a period
Bank.
The equitable division of
ical report of their
the burden of uncollected checks is
jexplained in the same Section; as is j re serve re quirenent s.
jalso set out the jurisdiction cf the A comparison wall
then be available with
[Bank in the calculation of reserves
the reserves actually
jcarried with it.
'carried. If any pen-,
alty be necessary on
account of deficiency
maintained over a
given period it can
then be fined as may
be directed by the
Federal Reserve Board
as provided in Sec
tion 15 of the Act.
The present method to
continue' until, ex
perience develops the
necessity for change.
This recommendation carries its own
reason.
The present -method
to continue until ex
perience develops the
Inecessity for change.
-
9
-
FUNDAMENTALS
REASONS:
11 - That unifora
me theis should he
followed “by Federal
Reserve Banks in the
handling of InterDistrict remittances.
Federal Reserve Banks should be en
abled to have their books agree with
every other Federal Reserve Bank at
the close of business each day.
1Z - The expense of
operation should be
left as a matter to
be taken up later
after experience has
developed the approx
inate cost psritem.
After a few months1 operation, some
definite figures will be obtained
and from then cn an equitable assess
ment of expense can be levied.
4/10/16.
5 S6 - 3c.
METHODS:
Uniform types of re
mittance letters
should be adopted,
showing when each re
mittance will be
charged by the send
ing bank. Advices
of credit by the
receiving bank should
show when the out- '
side checks will be
available for the
sending bank. They
should be held in a
Transit account un
til the date the
funds become avail
able «
l
^ <Q
KJ?
i.'7
W. P. 0. HARDING, GOVKRNOR
PAUL M. WARBURG. VlCI GOVERNOR
FREDERIC A. DELANO
ADOLPH C. MILLER
CHARLES S. HAMLIN
Kx-Officio Member*
WILLIAM « . MCADOO
SECRETARY OF THK TREA8URY
CHAIRMAN
JOHN SKELTON WILLIAMS
H. PARKER WILLIS. SECRETARY
SHERMAN P. ALLEN. Af ST. SECRETARY
FEDERAL RESERVE BOARD
COMPTROLLER OF T N I CSRHNNCT
and
Fiscal
as e n t
ADDRESS REPLY ® g 7 #
WASHINGTON
FEDERAL RESERVE BOARD
March
1916 .
Dear Sir:
The following message was authorized by the Federal
Reserve Board at its meeting of March 2 1 , and was 3ent to all
those banks, which have filed applications for the sale of bonds,
vdiich could not be reached in sufficient time by mail.
"Applications for the sale of bonds through the
Treasurer of the United States on March thirty-first
have been received from member banks up to the closS
of business today.
Indications are that bonds offered
for sale will very considerably exceed'amount to be al
lotted to Federal reserve banks because many of these
banks have already purchased more than their allotment.
Hence in answer to an inquiry the Board has ruled that
applications may be withdrawn if request for withdrawal
is received by the Board before March twenty-eighth."
The notice is mailed to you as an applicant bank and
reply may be sent by mail or telegraph in the event that you
*\
desire to withdraw all or any of the bonds you have tendered.
The notice must, however, be received by the Board before the
close of business on March 2Sth.
Respectfully,
Secretary
W. P. G. HARDING, G O V E R N O R
WARBURG, V ic e g o v e r n o r
a A. DELANO
C. MILLER
CHARLES S. HAMLIN
Ex -O fficio Members
WILLIAM G. McADOO
SECRETAR Y OF THE TREASURY
C h a ir m a n .
JOHN SKELTON WILLIAMS
H. PARKER WILLIS. S E C R E T A R Y
SHERMAN P. ALLEN, A S S T . S E C R E T A R Y
FEDERAL RESERVE BOARD
Co m p t r o l l e r o f t h e c u r r e n c y
and
WASHINGTON
Fis c a l A g e n t
A D D R E S S R E P L Y TO
FEDERAL RESERVE BOARD
/
March 2U,
1916
Sir
In answer to several inquiries regarding proper entries
to be made on Forms
3X
and FRA-5, in case of redemption of Federal
reserve notes., either, "fit" or "unfit",' received from a Federal
reserve■bank, a Federal reserve agent, or in the ordinary course
of business, the. following entries are suggested as satisfactorily
representing the transactions in question:
1.
When cancelled Federal reserve notes are forwarded
by the bank to the Treasurer of the United States for re
demption, the bank should increase on Form 3 ^
"Mutilated
currency forwarded for redemption11 (Item BONE) and decrease
"Federal reserve notes on hand1’ (Item BEET);
no entries,,
however to be made on FRA-5*
(a)
When advice is had from the Treasurer of the
United States to the effect that such notes have been
received (notices being sent simultaneously to the bank
and the Agent),, the bank should increase either "Gold
settlement fund" (BABE) or "Gold redemption fund" (BELT);
depending on what arrangement is made between the Agent
and the bank and with the Treasurer ox the United States,
961
- 2 -
583-
and sh ou ld decrease a t the same time "M u tila te d currenoy
forwarded fo r redem ption" (BONE).
(b)
In case g o ld or la w fu l money i s returned to the
“bank by the Agent on account of F ederal reserve notes re
deemed, the b a n k 's cash reserve (g o ld or la w fu l money)
should be increased in ste a d of the items s p e c ifie d in
paragraph ( a ).
In the memorandum account on the l i a b i l i t y sid e
of Form
the fo llo w in g chsuiges should a ls o be made:
Decrease "F ederal reserve notes o u tsta n d in g " (Item DEER);
a ls o "G old and la w fu l money" (Ite m DOPE).
T h is w i l l r e s u lt in reducing the amount of Fed*
e r a l reserve notes o u tsta n d in g a3 w e ll as the amount of
g o ld or la w fu l money deposited w ith the Federal reserve
agent, but w i l l leave the bank'3 net l i a b i l i t y on F ederal
reserve notes o u tsta n d in g unchanged.
Upon re c e ip t of n o tic e from the Treasu rer of the
U nited S t a te s , the Agent should in crea se on Fora: FRA-5 j
"Fe d e ra l reserve notes returned to C o m p troller of Currency
fo r d e str u c tio n " and should decrease "F e d e ra l reserve notes
o u tsta n d in g ", "P r e v is io n fo r redemption of F e d e ral reserve
n o te s", and "C re d it balance in go ld redemption fu n d ", except
when go ld or la w fu l money i s returned by the Agent to the
bank, in which case "Gold on hand" or "Law ful money on hand"
sh ou ld be decreased in ste a d of "C re d it balance in g o ld r e -
962
-
demption fu n d ".
3
5S9«
-
Whenever a t r a n s fe r of c r e d it s i s made
from the A g e n t's c r e d it "balance w ith the F ederal Reserve
Board to the b a n k 's account in the g o ld settlem ent fund
in connection w ith the redemption of F ederal reserve notes,
a p p ro p riate e n tr ie s should be made on Form FRA-5*
II.
When n o tic e i s had by the F ederal reserve agent from
the Treasurer of the U nited S ta te s th a t " u n f i t " F ederal
reserve n otes, received from some source other than the
bank, have been redeemed by him and charged to the A g e n t's
g o ld redemption fund, the fo llo w in g changes should be made
on Forms 3*+ and FRA-51
In the memorandum account on the l i a b i l i t y sid e
of Form
the bank should decrease "F e d e ra l reserve jiotes
o u t s ta n d in g "( Item DEER) and"Gold and la w fu l money w ith Fed
e r a l reserve agent for* the retirem ent of o u tsta n d in g Federal
reserve n o te s " (Item DOPE).
T h is w i l l r e s u lt in red ucing
the amount of each of these two item s, but w i l l leave the
b a n k 's net l i a b i l i t y
on F ederal reserve notes o u tsta n d in g
unchanged.
The F ederal reserve agent should in crease on Form
FRA-5 "F e d e ra l reserve notes returned to C o m p trolle r of Cur
rency fo r d e s tr u c tio n " and should decrease "F e d e ra l reserve
notes o u tsta n d in g ",
"C re d it balance in g o ld redemption fund",
and "P r o v is io n fo r redemption of F e d e ral reserve n o t e s ".
963
_ k -
III.
5S9-
In case "fit" Federal reserve notes are redeemed by
the Treasurer of the United States., they will be charged to
the bank's gold redemption fund and returned to the bank of
issue, in which case the Federal reserve bank should increase
"Federal reserve notes on hand" (Item BEET) and decrease
"Due from Treasurer of United States, gold redemption fund"
(item BELT). . No entries should be made by the Agent on
Form FRA-5IV.
When cancelled Federal reserve notes are returned
by the Agent to the Comptroller of the Currency for destruc
tion, the Agent should increase "Federal reserve notes re
turned to Comptroller of Currency for destruction" and de
crease "Federal reserve notes on hand".
be made by the bank on Form
No entries should
3 ^*
Where.reference is made to changes on Form
it
is understood, of course, that appropriate entries shall be
made in general ledger accounts, balances of which only are
shown on Form 3^*
It is thought that the above suggestions, while by no
means exhaustive of the subject, will be found sufficiently de
tailed to insure uniformity of treatment by all Federal reserve
banks of all the various transactions connected ’with the redemption
and destruction of Federal reserve notes.
964
- 5 -
589-
The appended chart, prepared by Mr. H. M. Jefferson
of the Federal Reserve Bank of He^v York, may be found useful
in this connection.
Respectfully,
Governor.
965
%
W. P. G. HARDING. GOVERNOR
PAUL M. WARBURG, VICE GOVERNOR
FREDERIC A. DELANO
ADOLPH C. MILLER
CHARLES S. HAMLIN
EX*OPFlCIO M E M B E R *
WILLIAM 0 . MCADOO
SECRETARY OP THK TREASURY
CHAIRMAN
JOHN SKELTON WILLIAMS
COMPTROLLER O P T M I CU RRENCY
FEDERAL RESERVE BOARD
WASHINGTON
H. PARKER WILLIS, SECRETARY
SHERMAN P. ALLEN* ARET. SECRETARY
and
Fis c a l
FEDERAL RESERVE BOARD
March 27, 1916.
Dear Sirs:
.
One of the hanks in your section of the Federal
Reserve District of Dallas has written to the Federal Re
serve Board stating its desire to he transferred to the Fed
eral Reserve District of Kansas City, urging as the reasons
for such transfer; geographical location, better mail facili
ties, and the necessity for carrying balances in Kansas City,
Will you please advise me whether you are satisfied
to remain attached to the Federal Reserve Bank of Dallas or
if you would prefer to be transferred, if this can be done?
Very truly yours.
«
A DDRE SS r e p l y t o
966
W. P. 0 . HARDING, GOVERNOR
PAUL M. WARBURG. VICE GOVERNOR
FREDERIC A. DELANO
ADOLPH C. MILLER
CHARLES S. HAMLIN
WILLIAM « . McADOO
SECRETARY OF T H I TREASURY
CHAIRMAN
JOHN SKELTON WILLIAMS
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
H. PARKER WILLIS. SECRETARY
SHERMAN P. ALLEN. ASST.SECRETARY
AND FISCAL AOENT
ADOI
WASHINGTON
TO
FEDERAL RESERVE
s e r v k BOARD
5y*
March SB, 1916
Dear Sir»i
There is enclosed for your information copy of a
resolution, adopted by the Federal Reserve Board at its
meeting today, in connection with the sale of United States
bonds offered by member banks of the Federal reserve system
through the Treasurer of the United States under Section IS
of the Federal Reserve Act*
You will note from the resolution that the Board
has determined under the circumstances to make no allotment
Of bonds for purchase at this time*
Very respectfully,
Governor
RESOLUTION ADOPTED BY THE FEDERAL RESERVE BOARD
Tuesday, March 2S, I91S.
W H E R E A S ,
It appears from statement furnished
the Board "by the office of the Secretary that eleven out
of the twelve Federal reserve hanks have purchased in the
open market bonds in excess of the amount which might he
allotted to such hanks at the end of this quarterly per
iod on a basis of one-fourth of twenty-five million dol
lars which the Board had considered alloting at this time,
and
W H E R E A S ,
The bonds offered for sale through
the Treasurer under Section IS of the Federal Reserve Act
aggregate more than twenty times the amount which might
he allotted on the basis indicated, and it will, there
fore, be possible on this basis to sell for each member
bank less than five per cent of the amount offered for
sale, and
W H E R E A S ,
It appears that the only Federal
reserve bank which has not purchased in the open market
bonds in excess of the amount which might be allotted to
it is under contract to purchase a sum very largely in
excess of its allotment and has been prevented from con
summating such purchase by reason of the fact that more
than nine million dollars in lawful money has been de
posited with the Treasurer during the current month to
retire circulation by national banks and the banks under
contract to sell are thereby prevented from making de
livery.
NOW, THEREFORE, BE IT RESOLVED, That it is the
sense of the Board that no necessity exists for enforc
ing the requirement provided for under' Section IS of the
Federal Reserve Act at the end of this quarterly period
ending March 3 1 # 19l6 , and that it will not at this time
require the Federal reserve banks to purchase any of those
bonds which are-offered for sale by member banks through
the Treasurer of the United States under the provisions
of Section IS.
BE IT FURTHER RESOLVED, That the Secretary be in
structed to send a copy of this resolution to the various
Federal reserve banks and to the member banks which have
offered bonds for sale in order that they may be notified
of the action of the Board in the premises.
THE PRESENT COTTON SITUATION.
SPEECH OP W. P. G, HARDING, MEMBER FEDERAL RESERVE BOARD,
UNDER THE, AUSPICES OF THE BIRMINGHAM CHAMBER
OF COMMERCE, AT BIRMINGHAM, ALABAMA* FRIDAY
EVENING, MARCH TENTH, 1916.
(For release Saturday morning, March 11)
During the next six weeks, assuming normal weather con
ditions,
the cotton crop of 1916 will he planted.
While
the acreage put in cotton will hear a direct relation to the
size of the new crop, other factors must he considered in
reaching conclusions as to the final outcome.
The quality
and amount of fertilizer used, the character of the season,
methods of cultivation,
the ravages of the hell weevil and
other insect damage will all have an important hearing,
so
that under some conditions it is conceivable that thirty
million acres planted in cotton will produce a larger yield
than thirty-five million acres under other conditions.
The
new crop acreage however, which will probably he known
definitely within the next sixty days, will play an import
ant part in fixing the market value of that portion of the
crop of 1915 which remains unsold, for it is likely that not
until July will reports of condition of the growing crop
become a factor in price control.
It will he remembered
9
~z~
that during last July there was a decided slump in the cotton
market which brought about an extremely nervous feeling
throughout the South.
Despite the very vigorous and dili
gent campaign that had been made in the spring of 1915 for
a sharp reduction in cotton acreage, reinforced as it was by
the severe object less*a of the dangers of over-production
that had been impressed upon cotton growers during the preced
ing Fall and Winter,
it was found that the area planted in
cotton had been reduced by only about 15$.
The season up to
July had been propitious and there was much talk of a new
crop of at least fourteen million bales.
It was known also
that. Great Britain intended to declare cotton an absolute
contraband, which was regarded as meaning the loss of a mark
et for about two and one-hglf million bales which had usually
gone to Germany and Austria, and which had, to a considerable
extent during the season of 1914-1915, reached those
countries through neutral ports.
Farmers and business men
throughout the South were aroused, and, without any definite
organization, but through the force of public sentiment, a
policy of gradual marketing was decided upon.
Warehouse
facilities had been found to be adequate and the banking
situation was such as to render ample funds available to
carry out such a policy.
At the same time it became evident
970
-3-
that the yield would not he as large as had been anticipated,
so that consumers, finding that there be no rush of cotton to
the market, for sale at forced prices, began to contract for
their wants, and prices advanced rapidly.
The new crop, in
stead of bringing seven to eight cents per pound,
as had been
predicted by many pessimistic persons, found a ready market
up to 12g-/ per pound, and cotton seed advanced in a corres
ponding degree so as to give producers the equivalent of
$20.00 to *22.50 per bale from sales of seed.
The advance
attracted speculative interest and by December some enthusiasts
had visions of 15 to 18 cents per pound.
Many farmers and
merchants who, a few weeks before would have sold most gladly
at 12 cents, caught the infection and decided to hold for the
much higher prices which they felt were coming.
About this
time however, the export movement began to compare unfavorably
with the previous season.
Ex:cept as to coastwise trade, our
ocean freights are carried almost entirely in foreign bottoms.
Of these, German vessels are idle, being interned in neutfsp.
ports throughout the world,
of the North Sea.
or else blockaded in the waters
This scarcity of shipping has caused a
great advance in ocean freight rates, which are from six to
ten times the normal, so that rates on cotton from American
ports to Liverpool have been ruling as high as three dollars
per hundred pounds,
or fifteen dollars per bale, being three
cents per pound*
Even at these abnormal rates,
exports of
cotton have been restricted, as ship owners, acting probably
under instructions from their Governments, have given prefer
ence to cargoes of grain and munitions.
stocks abroad have been greatly reduced,
Under these condition
and during the
month of January there was a time when the stock at Liverpool
was sufficient to supply British spindles for less than six
weeks, with prices ruling at 18/, against 12/ in Hew York.
There is reason to believe however,
that during’the past
month arrangements have been made to increase the ship room
available for cotton, and there has been some increase in the
supply at Liverpool, London and Manchester.
The total stocks
in Great Britain on March 3rd have been estimated to be
1,000,000 bales, against 1,452,000, 1,209,000 and 1,498,000
bales for the same date in 1915, 1914 and 1913, respectively.
The depletion of stocks on the Continent is still more marked.
The Financial Chronicle estimates the supply of stock at Ham
burg, Bremen and Trieste to be about 1,000 bales at each
point, against a total of 384,000 bales on March 1st, 1315,
570.000 bales in 1914, and 578,000 bales in 1913;
cluding stocks at Havre, Marseilles,
and, in
Barcelona and Genoa,
it
estimates Continental stocks on March 3rd at 479,000 bales,
against 1,083,000 bales in March 1915, 1,065,000 in 1914 and
1.089.000 in 1913.
The Chronicle places the total visible
-
5-
supply for the world on March 3rd at 5,777,448 bales, against
7,607,227, 6,107,140, and 5,491,952 bales in 1915, 1914 and
1913, respectively.
In Egypt figures relating to cotton re
ceipts are expressed in cantars, approximating 100 pounds, and
exports in bales which weigh about 750 pounds.
Reducing the
figures to the equivalent of 500 pounds to the bale, receipts
of cotton at Alexandria from August 1st to February 9th have
been, according to the same authority,
790,300 bales against
042,500 bales last year, and 1,350,000 bales for the same date
in 1914.
The Financial Chronicle's report dated Friday night,
March 3rd, gives the following statement as to the movement
of the crop for the week:
Total receipts,
107,849 bales,
against 156,956 and 142,403 bales for the two weeks immediately
preceding.
Total receipts since August 1, 1915, 5,402,039,
against 8,093,162 for the same period of 1914-15.
since August 1, 1915, 2,691,123 bales.
142,143 bales,
Decrease
Exports for the week,
of which 73,972 were to Great Britain,
to France, and 44,046 to the rest of the Continent.
24,125
Total
exports August 1, 1915 to March 3, 1916, to Great Britain,
1,755,493 bales, against 2,487,993 bales for the same period
last jTear;
to France, 510,883, against 376,892;
to Continent,
1,295,565, against 2,672,188, making a grand total of 3,561,941,
against 5,537,073 last year, and 7,296,085 for 1913-14.
export movement therefore,
The
is approximately 2,000,000 bales
f
-6-
behind last year and nearly 3,750,, COO bales under 1914.
There
seems to be no material difference of opinion on the part
of various authorities as to stocks of cotton held abroad or
as to the exports,
but there is some divergence in the views
as to the domestic situation.
A well known cotton authority,
who prefers not to be quoted, gives me. the following estimate
of the supply of cotton in America on July 31, 1916, at the
close of the current cotton year:
Visible supply in U. S., July 31, 1915.......1,300,000
Unmarketed on plantations, July 31, 1915.... 1,800,000
Crop 1915-1916 (including linters)..... ....12,250,000
Total supply this season................15,350,000
American consumption..... .
.7,000,000
Total exports........... ..6,500,000
15,500,000
leaving on hand visible and invisible. . Z 1,850,000
and checks his figures as follows:
Unmarketed July 31st, 1915.................... 1,800,000
Crop, 1915-16............................... .13,250,000
Total supply from plantations......... ..14, 050,000
In sight to February 26th, 1916........... .. 9, 554,795
Unmarketed supply February 26th......... 4 495,205
Stock U. S. ports, Feb. 26th................. 1 410,285
Stock Interior towns Feb. 26th............. 1 102,047
Total supply in U. S. Feb. 26th......... 7,007,537
U. S. Consumption, season....7,000,000
Total takings to Feb. 26th...4,684,000
Still to be taken.......2,316 ,'000-2316000
Exports, season
6,500,000
Exports to Feb.26th..........3,561,922
Still to be exported. ... .2,9"S8,078-2938078
5,254,078
1,753,459
I quote as follows from a letter received from him:
"It is reasonably plain that if we export 6,500,000
hales of cotton this year, w e .shall not have more
than about 1,800,000 hales left over in the United
States.
This includes the cotton at the ports and
interior towns as well as the unmarketed supply on
the plantations.
I do not think it can be consi
dered burdensome with the financial facilities that
the Federal Reserve Banks provj.de, and if the war
ends during the present summer, I believe that all
the cotton that is left over and all that America
can possibly produce next year will be required to
fill up the vacuum created by the blockades and the
w a r .,T
Another view is given in the weekly cotton letter dated
March 4th of a well known brokerage house which adopts the
figures and estimates of the Watkins Bureau.
From this
s t at erne nt I quo t e :
"The world's visible supply of American cotton is
now 1,604,000 bales less than at this date last
year and 64,000 less than in 1914.
The stocks of
American cotton in Liverpool with one exception,
are the smallest in the past ten years, and prac
tically the same is true of Continental stocks of
American cotton.
Our cotton markets are absolutely
closed to Germany and Austria, which was not the
case at this date last year and yet in spite of
the extraordinary advance in ocean freight and in
surance (the rate to Liverpool is now $15.00 a
bale as compared with about $1.00 August 1, 1914)
we exported the first six months of the season
2.961.000 bales and to date 3,680,001, clearly in
dicating an export movement for the season of
fully 6,000,000 bales. The domestic consumption
for the first six months of the season amounted to
3.528.000 bales and it is increasing as the season
advances, foreshadowing a total of fully 7,250,000
bales for the year.
With a supply of about 14,675,000
t/ <r >■
-8-
bales (made up from the carry-over from last year
of 2,765,000 bales, the crop estimated' by the
Government at 11,161,000 and an'estimated 1 inter
crop of 750,000) and allowing 6„000,000 bales for
export and 7,250,000 for domestic consumption, we
would close the season with an apparent surplus of
1,425,000 bales«-,T
There is a difference in the estimates of these two authori
ties of 425,000 bales.
The first mentioned estimate places
the carry-over from last year at 3,100,000 bales, while
the second puts the amount carried over at 2,765,000 bales.
The first places the present crop,
including linters, at
12,250,000 bales, while the second, accepting the Government
estimate, figures the crop, including linters, at 11,911,000
bales.
The first estimate puts American consumption at
7,000,000 bales and exports at 6,500,000 bales,
of 13,500,000 bales;
or a total
while the figures given by the second
are 6,000,000 bales for export and 7,250,000 bales American
consumption,
however,
or a total of 13,250,000 bales.
Mr. Watkins
from
says further that/the apparent surplus of 1,425,000
which is shown according to his figures,’'there must be de
ducted 1,179,000 bales of linters, 429,000 carried over from
last year and the linter crop of this year,
750,000,
every
bale of which will go into the manufacture of explosives.
This cuts the spinner1s supply down to about 13,500,000
bales, leaving an apparent surplus at the close of the season
i
976
-9-
of about 250.000 bales*"
I am informed that the Census
Bureau in its statistics relating to the uses to which cotton
is put,
is confined to the consumption cf raw dotton,
in
cluding linters, and that additional legislation will be
necessary to enable the Census Bureau to report on the con
sumption of cotton which has been specially prepared or
treated.
At a recent hearing before one of the House com
mittees it v/as brought out that the Census Bureau regards an
estimate of 1,000,000 bales of cotton used in America during
1915 for the manufacture of explosives as conservative, and
the statement was made at the time by the representative of
the Bureau that it is possible that as much as 1,500,000 bales
had been used in this way during the year in the United
States.
It has been estimated unofficially that 2,000,000
bales were used in Europe last year in the manufacture of
l
explosives, but I am told that the Census Bureau has no
figures which throw any light upon the consumption abroad
of cotton for this purpose.
It is evident that muc& of the
cotton now being exported to Prance is being used for ex
plosives, as most of the cotton mills of Prance and all of
those of Belgium are now within the German lines and are
presumably not running for lack of cotton, although it is
impossible to obtain definite information on this point.
Swiss mills are said to be very busy, but their supplies of
cotton have been cut off recently because they were supposed tO
be selling to Germany and Austria*
Consumption by mills
in Norway and Sweden, Holland and Spain, would be abnormally
large if they could get the cotton, but high freights and
naval operations in the North Sea have rendered their supply
precarious.
Japanese mills will undoubtedly consume a
great deal of cotton, but on account of proximity and lower
freights they will probably take all they can from East
India.
The Russian mills are reported to be busy, but their
supplies of American cotton must, for the present, come by
way of Vladivostok, which means a long and expensive overland
haul on a railroad congested with war material.
The Port
of Archangel however, which is ice-bound at present, will be
open in May, and it is probable that Russia will q.dd to its
stock of American cotton after that time.
It is interesting to contrast the export movement during
the present season with that of the last.
The outbreak of
the war in Europe on the first of August 1914 resulted in a
practical stoppage of cotton exports until November.
During
December and January 1915, the movement abroad was heavy.
While this movement was stimulated in February and March by
the announcement of the forthcoming blockade of British waters
by German submarines,
the volume of exports continued satis
factory until early in May, or until the sinking of the
Lusitania.
Prom this time on the export movement diminished
appreciably and the advancing tendency in cotton prices was
checked, followed by the slump in July, to which reference
has already been made.
During the present season, exports
from August to November ran considerably ahead of the very
light movement of the preceding year, but since November,
owing to the reasons already outlined, the export movement
compares unfavorably with that of the previous season, al
though the movement for February compares well with that of
February 1914.
The decline in cotton prices seems to have
been definitely checked about the first of March.
It is
said that several British merchant ships hitherto used as
transports, are to be restored to commercial uses in the
trade between New York and Liverpool.
Italy and Portugal
together have seized over 60 German steamers which have been
interned in their ports, the presumption being that these
steamers will be put into commission for mercantile purposes.
At any rate, there has been an easing in ocean freight rates,
which now show a decline of &0$/ per hundred,
or $2.50 per
bale from quotations current the latter part of February.
Announcement was made a few days ago that 12 steamships are
-IE-
due to arrive at an early date at Galveston, which will load
with cotton from that port®
The latest issue of the
Economic World, which is a recognized authority on the
textile trade, has this to say regarding the demand for
cotton:
w The margin of profit between the cost of raw
cotton and the market values of goods in the
United States is now unusually wide, and it
is the part of commercial wisdom for the manu
facturer to secure fsrr himself this margin of
profit, no matter what his inclination or judg
ment may be with respect to a possible wider
margin of profits in the future.
This consi
deration has induced a fair amount of buying
for the account of American spinners during
the past week.
Were it not that much the larger
part of the requirements of our mills for the
season has already been secured, this buying
might be counted upon as a sustaining and per
haps even as an advancing influence in the markets
for the imm§diate future.
In addition to this
buying for American account, some buying for
foreign account has been in evidence.”
The ability and disposition of the banks of this country to
take care of the legitimate wants of their customers, as well
as to carry well secured ‘loans for those who are not customers
has never been greater than at present.
At the close of
business on March 6th the total of all paper under discount
with Federal Reserve banks, including rediscounts for member
banks, open market jjurchases of bankers1 acceptances, trade
acceptances and commodity loans carried for member banks, was
slightly over $51,000,000 against total deposits held by these
980
-
13-
institutions 6f $454,761,000;
while on January 2nd the amount
of paper under discount was over $54,000,000 against deposits
of $431,085,000.
Except in the Richmond and Atlanta dis
tricts the loans secure)! by cotton receipts are of a negligibl
amount, and in these two districts they have been considerably
reduced since the first of the year.
The total bills dis
counted with the Federal Reserve Bank of Atlanta,
including
the New Orleans Branch, was, on January 2nd, $8,200,000.
On March 6th this amount had been reduced to $4,420,000. The
amount of loans held by the Federal Reserve Bank of Richmond
on January 2nd was $7,612,000, and on March 6th the amount of
its loans was $6,433,000.
The amount of discounted paper
held by the Federal Reserve Bank of St. Louis cn January
2nd was $1,915,000, while on March 6th the amount was
$1,429,000.
The loans of the Federal Reserve Bank of Dallas
on January 2nd amounted to $4,911,000, and on March 6th to
$4,550,000.
The same conditions are reflected in the state
ments of member banks.
In all sections of the country first
class commercial paper is sought for at abnormally low
rates, and I may say that for several months past the chief
concern of the Federal Reserve Board over the monetary situa
tion in this country for the immediate future has been that
the unusually low rates prevailing in financial centers might
lead to an unwise inflation of credits.
There is every
-
14-
reason to believe that exports of cotton will continue on
approximately the present scale during the spring and summer
months, up to the close of the present cotton year, and there
seems to he little danger of there being an unwieldy surplus
carried over into the next season.
There is undoubtedly a
considerable amount of unsold cotton in the South which is
being held by farmers and country merchants, but the amount
is probably no greater than in some previous years, as the
stocks reported at interior towns on March 3rd amounted to
1,080,000 bales, against 1,063,000 bales at the same towns
on March 5th 1915.
During the week ended March 3rd the in
terior stocks decreased 35,761 balos, and receipts at all
towns were 84,838 bales less than for the same week last
year.
Attention is invited to the Financial Chroniclers
comparative statement of amount brought into sight and
spinners1 takings for the weeks ended March 3rd, 1916 and
March 4th, 1915:
-15-
In sight and spinners*
Takings.
Week
Receipts at ports to
March 3.......0.®.. 107,849
35,173
ifet overland to 3/5.
Southern consumption
82,000
to March 3 .........
Total marketed... 225,022
Interior stocks in
excess.............. *35,761
Came into sight dur
ing week........... 189,261
Total in sight 3/4..
Uorth spinners* tak
ings to March 3....
34,396
*Decrease during week.
1915-16
Since
Aug. 1
1914-15
Week
Since
Aug. 1
5,402,039
1,011,489
284,634
31,314
8,093,162
921,677
2,190,000
60,000
1,830,000
8,603,528
375,948
10,844,839
634,711
*64,959
943,420
310,989
11,788,259
9,238,239
88,743
2,135,026
2,047,309
Movement into sight in previous years:
Week1914 March 6
1913 March 7
1912 March 8
Bales
198,304
154,692
281,157
Since Sep t .1.
1913- 14 March 6
1912- 13 March 7
1911- 12 March 8
Bales.
12,673,042
11,856,556
13,421,418
Some private letters that I have received state that
there were perhaps two million hales of cotton held on March 1st
by Southern farmers and local merchants.
If all of this cot
ton, or any large part of it should be thrown upon the market
at once, there would undoubtedly be a break in prices. But five
months, or about 21 weeks will elapse before any new cotton can
cone on the market.
With the demand for export and from
American spinners which seems assured,
there is no reason to
('Q9
• O )
-
16-
doubt the ability of the market to absorb much more than
100,000 bales per week.
I refrain however, as I have always
done, from giving advice in particular cases,
I believe that
the policy of gradual and orderly marketing of the crop has
been proved to be the correct one by the course of the market
this season, and, while there are no doubt many holders of cot
ton who will regret that they did not sell when prices were
higher, it is no doubt true that the higher prices last fall
were obtainable by reason of the fact that there was s^o un
seemly rush of cotton to the market;
ownership,
and, without regard to
it is safe to assume that the cotton held back has
contributed its part to the prices realized for cotton that has
been sold.
I wish that each individual farmer would remember*,
when the time comes for him to determine how much of his land
he will put in cotton this spring,
that we are living in unusual
anft
times and that it is impossible for any man or/group of men to
forecast with certainty what the consumption of a staple like
cotton will be.
I believe in the gradual and orderly marketing
of crops, but I believe just as firmly in the diversification
of crops.
i'a,rmers of the Northwest who produce the bulk of th^
great food crops of this country, have learned that it is
dangerous to place reliance in one crop, even though it be a
food crop, and, while they cannot raise cotton^ they diversify
by planting different kinds of grain, and by producing more than
984
-17-
one kind of food.
I quote q statement that was made recently
by a prominent bank in the Northwest:
"The investment market does not seem to be as active
as the large amount of money in banks and the heavy
savings balances would ordinarily indicate. General
interest rates are so low that many people are con
tent with savings bank interest.
The demand for
farm mortgages is very strong, but our farmers are
in such excellent condition financially that the
supply of mortgages continues to be less than the
demand.
This, of course, has resulted in a decrease
of rates to the farmers. Mortgages from the best
farming communities of Minnesota and the Dakotas are
especially hard to obtain.
In former years, when
there were plenty of these securities, it wq,s not
necessary for capital to go into the newer parts of
the Northwest unless attracted by high rates.
It is
probable that present conditions will turn large
amounts of money to investment in the less populous
portions of the Northwestern States and will result
in increased settlement and greater value for land.
Whether this condition will result in an extended
movement ’'back to the farm,1 cannot, of course, now
be predicted, but tendencies in that direction have
already been reported from two or three sources.”
I am sorry that I cannot yet quote similar statements from
Southern sources, but I think within a few years, after the
South has learned the lesson of diversification, that like con
ditions will prevail, at least in favored sections.
subscribe to the
I wish to
loctrine that is being and has been for years
so effectively preached by one of the best known, and perhaps
the most useful citizen of Alabama, Mrs.
G. H. Mathis, who has
a message of cheer and hope wherever she goes and who inspires
thedispirited with new hopes and aspirations.
diversified farming.
She believes in
She says that farming is a good business
985
-18but she warns the farmer that "the ground is sick of one crop.
It is sick of cotton and by running the land down you are having
to mortgage your property to death, and are making the crop
self-consuming.
Build it up.
There are certain robber crops
and certain builder crops that everyone ought to know.
robber crops are cotton, corn, wheat and oats.
are peas,
The
The builder crops
beans, clovers and vetches, and you can build the land
in winter when it is not in use.M
I am told that there are farmers in Alabama, and perhaps
in all Southern states who have never grown a stalk of corn.
Let the farmersrealize, and I urge upon merchants and bankers
the importance of persuading them, that an increased acreage in
cotton will be looked upon as an arguipent in favor of lower
prices for the remainder of the crop now being held, although
it is by no means certain that a large acreage would yield a
larger crop than a smaller and better cultivated area.
Let us
suppose things turn out this year as some optimists predict.
Suppose peace should be restored and there springs up a greatly .
increased demand for cotton.
Under such conditions a large crop
would of course sell for a great deal of money, but with the
experience of 1910 and 1911 before us, is there any reason to
doubt that a moderate crop would sell for still more?
other hand,
suppose the war continues;
On the
suppose, unhappily,
this
986
-
19-
country should become involved, —
and remember that in times
of stress, when it comes to a choice between something to eat
and something to wear, food must be provided at any cost, while
new clothes can wait.
Then I ask, would we not be far better
off with a moderate supply of cotton and an abundance of food
supplies?
thoroughly?
Why plant a larger area than can be cultivated
Why scatter high priced fertilizer over a large
field when it would be more effective concentrated on a smaller?
These matters must be determined nowj
too late?
A month hence will be
Let the farmers, the merchants and the bankers cf
the South take counsel together, and let the newspapers, and
those published at the county seats particularly, advocate
in every issue for the next six weeks, and with all their force
and power,
the doctrine of diversification, and let them point
out the dangers of the one crop system^
Remember, my friends, that if the war continues for six
months longer, in all probability the purchasing power of Europe
will be seriously impaired.
The cost of munitions and supplies
is enormous, and food prices in the warring countries are soar
ing.
According to the Bureau of Labor Statistics of the
Department of Labor, good, taken as a whole in the United States
costs Ztfo more today than it did a year ago.
Prices in Great
Britain have increased about 44$ and in Prance about 22$.
In
r 07
-BOother "belligerent countries the advance has *been 1 0 0 % ,
Remember that the cotton exchanges are not eleemosynary in
stitutions, and that operators on cotton exchanges have no
sentiment except a desire for gain,
Market opinions vary as
conditions change, and operators are not consistent bulls or
bears, but shift their position without notice as new condi
tions arise.
The fact is realized in all the cotton markets
of the world that the course of prices depends primarily upon
the supply, and for the next three months at le^st, estimates
of supply will be based upon the new crop acreage.
What this
acreage will be in America depends upon the farmers of the
South*
Should they decide during the next few weeks to pro
duce their food stuffs at home and to plant cotton as a money
crop, their position will be secure, but if, disregarding all
the warnings and portents of the times, they decide upon a
policy of all cotton, they will be taking a tremendous risk
which no prudent business man would care to assume.
The Southern farmer is most powerful as a factor in the
cotton market at planting time.
"Every man at times is master of his fate#
«
The fault, dear Brutus, is not in our stars,
hut in ourselves,
That we are underlings."
6oi.
wier.fnB«Br)*Ju III RE PAYMENT OF DIVIDENDS BY FEDERAL. RESERVE BANKS. PAYMENTS,
UPON HEW STOCK SUBSCRIPTIONS. AND PAYMENTS UPON STOCK SURRENDEREDi
1*
(a)
Dividend Payments.
The Federal Reserve Board should he advised hy the officers of
the Federal reserve hanks when it is the intention to sub
mit the question of the payment of dividends to the direct
ors at the next meeting.
At the same time the hank should
submit to the Board the information as called for in the at
tached memorandum marked "A".
(h)
Dividends to he paid annually, if earned.
Books to he closed at
the close of business December 31st.
The suggested form of
dividend resolution, which has been prepared by Judge Elliott,
is attached to this memorandum and marked nB u.
Undistributed
earnings are to he carried in the profit and loss account.
No
transfers should be made to surplus account until such time as
accrued dividends have been paid to date*
Accrued dividends,
or interest on capital stock payments, are to be figured at the
rate of l/2$S per month.
The dividend distribution should ho
based upon the earnings for the year.
Accrued dividends for
previous year to he first paid, balance to he applied on divi»
dend for current year.
2*
(a)
Additional stock:
Payments on additional stock sub
scriptions of member banks.
Until cuch time a3 dividends have been paid in
full to the last "regular dividend date, new stock is to be paid
for at par.
When accrued dividends have been paid -to date,
■
k 990
- 2 -
601.
stock subscriptions during the following year are to be
paid for at par, plus
l/2
per cent per month since the
last regular dividend date, if earned.
(b)
Stock subscriptions of new mesbar h^nksr
Rule outlined in pre
ceding paragraph should govern.
3*
Capital stock surrendered for
payment and cancellation.
Until such time as a reserve bank has retired its organization
expenses, surrendered 3tock should be paid for at par, un
less a material actual impairment is shev-n, or unless un
distributed earnings are sufficient to pay all accrued, cur
rent and organization expenses.
If a profit and loss surplus ha3 been accumulated, after allowing
for expense iteir.3 referred to in previous paragraph, surrend
ered stock is entitled to share in such undistributed earnings
as are shown by the books of the reserve bank on the last day
of the preceding month, to bs figured as follows:
Profit and loss account
______________
Current earnings (including
all accruals) .
______________
______
Less:
Current expenses, including,
cost of Federal reserve
notes used to date, allow
ance for depreciation in
furniture and vaults, and
depreciation in real estate,
and accrued expenses not paid
but cnargenble to period.
____________
Estimated l o s s e s ____________~
Estimated net undistributed earnings
______
Under the circumstances outlined, the surrender value of stock .will
991
601.
-3-
be par,, plug a share of the net undistributed earnings in the
proportion which the accrued dividend or unpaid interest on the
stock surrendered hears to the total accrued dividends cn the
stock of member bank3, up to the close
of business on the last
day af the preceding month, i.
P~r
T
Iffot undistributed earnings
after making allovtences for
accruals, depreciation and
estimated losses-
i-
*
Accrued dividend on stock
surrendered
Total accrued dividends
all member banks within
district.
Payments for additional stock and repayments to
member banks for stock surrendered, should bG made at regular
periods, say*, quarterly.
99S
601
"A"
Statement of Earnings
to be filed with
Federal Reserve Board
prior to a declaration of dividend*
Earnings since Jan. 1, 191 .
Rediscounts
Warrants
Acceptances
Commissions
Other sources
Accrued earnings (not credited)
Current expenses
Expenses paid, chargeable to period sinc9
Jan 1st
__
Accrued expenses to Is^t aay previous
month
__
Cost of Federal reserve notes used
.
Allowance for depreciation m vaults
and equipment
__
Depreciation m real estate
__
I7et earni jgs
Jan 1, 191_
Profit and Loss Account ______
Less interest payments maae on stock
surrendered since Jar. 1, 19J._
______
Profit anl loss balance after allowing
for net earnings since Jan. 1, 191__.
E3tirated losses
Available for distribution*
1
Suppleiaertal Information
1.
Unpaid indebtedness of closed banka to reserve banks. Give list,
show if notes are sectored, notes jd'.ich nave been past 4.a six
months or loiger, estimated losses.
2.
Member banks considered to be in over-extended or unsaio condition.
Give names of banks, indebtedness to Federal reserve bank, and
a memorandum of security, if any.
993
"A"
6oi.
- 2 -
Dividends.
Available for dividend payments
Dividend payment to be recommended to the
Board of Directors:
Per cent _____
Amount
Profit and loss account after allowing for proposed
dividend payment
NOTE:
In the opinion- of the Federal Reserve Board, there should
be retained in the profit and loss account an amount
equal to (a) Total of notes or other obligations bearing
the endorsement of failed banks when such
obligations have been pa3t due six months
or longer*
(b) 1C$ of net earnings to provide for unexpected
» '
expenses or losses. (During the first few years)*
Accrued Dividends.
Interest on capital stock payments to Dec. Jlj 1915
Dividends paid to data
Accrued and unpaid dividends to Dec. Jl, 1915
Accrued dividends - current year ( estimated )
Total accrued dividends to date
Estimated dividend payment to be recommended to Board
of Directors
Estimated balance unpaid dividends after allowing for
payment to bo recommended, to the Board of Diroctors
6$
994
.
-601-
PESOLtiTIOF FOR DIVIDEND*
WHEREAS, The officers of this association, hav© sirtanitted
to the Federal Roserve Board a statement of condition m form
approved by the Bo?rd, w m c h statement has been duly certified
by a committee appointed by this Boards and has been ordered
spread upon the minutes of t m s meeting,, and
WHEREAS, It appears from this statement that the estimated
accrued dividends due the stocKioldsrs on , ,
—
°* ■ ■■ ■■■■will amount to $ ,__________and that after charging to profit and
lass account all expenses, whether paid or acOrued which are prop
erly chargeable as current expenses, and efter making provision
for any depreciation th?t uay nave occurred m the vrlue of tho
assets owned by the b?nk and for probable losses, t h e n will rericm
m said profit and los3 account the sum of $ t , ----»
110% THEREFORE, BE IT RESOLVED, that a dividend to stock
holders of _ _ _ _ _ per cent, payable on
day of ,
be, and is hereby declared on all stock of this bank as shown by
the books of the bank on that date.
BE IT FURTHER RESOLVED, that e copy of this resolution be
transmitted to the Federri Reserve Board and upon its epproval
that the officers of this oank be, and they ere hereby, authorized
and directed to pay and distribute to said stockholders the divi
dend so declared, *That after the payment of all accrued dividends,
and after provision has been made for all expenses, losses and de
preciation m assets, s?id officer® are authorized, empowered and
directed to charge to profit and loss account and to credit to
the surplus account of this bank the sum of S
.
and pay the balance r e m r i m n g to the United States as a franchise
tax as provided by law.
* This part of the paragraph to oe used after full dividend*, nave been
paid to date.
V3/16
602.
T R E A S U R Y
D E P A R T M E N T
WASHINGTON.
April j j
1916 .
Charles S. Hamlin, Esq.,
Governor, Federal Reserve Board,
Washington, D. C.
S i r :
In response to your communication of the 27 th
ultimo, enclosing copy of a letter from the Carter White
Lead Company, West Pullman Station, Chicago, Illinois,
you are advised that drafts, acceptances, overdrafts and
post-dated checks, are not taxable under the Act of Octo
ber 22 , 191^, as promissory notes.
Your attention is invited to paragraph I of
T. D- 2170, as follows:
(l)
In view of the decision made by the
Supreme Court of the United States in the case of the
United States v. Isham (17 Wall, H06), that "the
liability of an instrument to a stamp duty, as well
the amount of such duty, is determined by the form
and face of the instrument, and can not be affected
by proof of facts outside of the instrument itself,"
this office is of the opinion that drafts, accept
ances, overdrafts, and post-dated checks are not
taxable under the above act as promissory notes,
even though they are used in such a way as to per
form some of the functions of a promissory note.
Respectfully,
DAVID A. GATES,
Actin'g Commissioner.
W. P . G. HARDING, GOVERNOR
P AU L M. WARBURG, VICK GOVERNOR
FREDERIC A. DELANO
ADOLPH C. M ILLER
CHARLES S. HAMLIN
Ex -O ffic io Members
W ILLIAM G. McADOO
SECRETARY OF THE TREASURY
C h a ir m a n
JOHN SKELTON W ILLIAM S
COMPTROLLER OF THE CURRENCY
H. PARKER W IL L IS , SECRETARY
SHERMAN P. A LLE N , ASST. SECRETARY
FEDERAL RESERVE BOARD
AND FISCAL AGENT
-606ADDRESS REPLY TO
W A S H IN G T O N
FEDERAL RESERVE BOARD
April 7* 19l6»
My dear Mr.
On behalf of the Committee of the Federal
Reserve Board on the subject of check clearing and
collection, and on behalf of the Board, I am send
ing you herewith a memorandum prepared by myself,
giving the reasons, as I see them, why it is im
portant for the Board to males progress in this mat
ter at this time*
^
I am also enclosing herewith
copies of four planswhich have been submitted to
the Board since the six plans which were sent to
you recently*- These four plans have been mimeo
graphed and bound together.
At this writing the Board has also just,
received a plan prepared in parallel columns by the
officers of the Federal Reserve Bank of St. Louis
and submitted by them, but this plan, having been
prepared on a wide carriage machine in parallel
columns, has not yet been mimeographed.
However,
we will endeavor to have this plan copied and sent
to you within a few days.
Yours very truly,
)n
W . P. G. HARDING, GOVERNOR
P A U L M. WARBURG, V ic e G o v e r n o r
FREDERIC A. DELANO
ADOLPH C. M ILLER
CHARLES S. H A M LIlf
Ex -O ffic io Members
W ILLIAM G. McADOO
^609.
SECRETARY OF THE TREASURY
C h a ir m a n
JOHN SKELTON W ILLIAM S
Co m p t r o l l e r o f t h e c u r r e n c y
FEDERAL RESERVE BOARD
W A S H IN G T O N
H. PARKER W IL L IS , SECRETARY
SHERMAN P . ALLE N , ASST. SECRETARY
AND FISCAL AGENT
AD D R E SS R E P LY TO
FEDERAL RESERVE BOARD
April 11, 1916.
Dear Sir:
The Federal Reserve Board has had under discussion with
the Treasury Department, particularly with Assistant Secretary
Malburn, suggestions which have come to it at various times that
National hanks he permitted to make deposits to the credit of the
Five Per cent Fund in the hands of the Treasurer of the United
States at Washington through their own Federal Reserve Banks,
ana that, if this can he arranged, it will enable Federal Re
serve Banks to render an important and desirable service to
their members*
The rule heretofore
has required National
hanks to get drafts on New York, hut it is now suggested that
that instead of requiring this, the hanks may properly he per
mitted to request their own Federal Reserve Banks to remit to
the Treasurer of the United States for their credit in the
Five Per cent Redemption Fund.
This would then he handled
(in denominations of $10,000) and at the convenience of the
Federal Reserve Bank of the District, through the Gold Redemp
tion Fund at Washington.
In carrying out this plan it is proposed that the
Federal Reserve Bank of New York shall have the privilege of
609-
- 2 -
paying for its member banks directly to the Assistant Treasurer
of the United States in that city, and, furthermore, it is the
idea that nothing in this plan shall prevent National banks from
making remittances direct to the Treasurer of the United States
or to the Assistant Treasurer at Hew York in the cld way if they
do not choose to avail themselves of the method herein proposed.
As this is e. natter in connection with the operation
of the Banks which nay well bo considered cy the Governors at
their forthcoming conference in Washington, it is now submitted
to you with the request that you take it up at that tine and
offer such suggestions or conclusions as you may have arrived
at.
Yours very truly.
Vice Governor
April 12, 1916
Sir:
Some months ago the Federal Reserve Board decided
that hereafter a copy of the report of examination of each
Federal Reserve Bank should be given to the respective bank.
It has no-,? boon suggested by one of the Governors that, in
order to insure dissemination of these reports, the Federal
Reserve Bank should in each case request each of its Di
rectors to read the report, initial it, and that the Chair
man of the Board of Directors shall notify the Federal Re
serve Board that the report has been read by these Directors,
and, therefore, had their full consideration.
The Federal Reserve Board would be very glad to
have this course adopted in the future.
Yours very truly,
Governor
fill.
COLLECTION OP OUT OP TOWN CHECKS BY FEDERAL
RESERVE BANKS.
(By W*. P. Gl Harding)
This is a matter that has engrossed the attention of the
members of the Federal Reserve Board and of the officials
6 f
the various Federal Reserve Banks, for more than twelve months.
It has been the subject of many conferences and several plans
have been suggested.
The problem involves the handling of
checks by a Federal Reserve Bank for its own member banks and
also inter-bank transactions.
The Gold Settlement Fund which
was established by the. Board about a year ago, may be regarded
as a satisfactory method of adjusting balances .between Federal
Reserve Panics.
In seeking a solution of the problems involved
in the intra-district transactions, it would bo well for the
Federal Reserve Banks to approach the subject from the same
angle that a newly established member bank would in its efforts
to build up
a
profitable business.
It should be borne in mind
that the Federal Reserve Banks are not required or permitted
to receive checks on deposit from the general public, but their
contact with checks is limited to such as they may receive from
their own depositors (their member banks) or from other Federal
Reserve Banks.
There has been no pressing need for radical
changes in the present methods of collecting country checks,_
1001
611
- 2 -
■
an evolution after years of experience,— but, as has been
pointed out frequently, it is the relation between the country
check and the reserves which must be considered.
After November
1917 no balances in any bank other than a Federal Reserve Bank
will be permitted to count as reserve and it is probable that
balances hitherto carried by country banks with their national
bank reserve agents, will .either be cartailed appreciably or
withdrawn entirely.
There is, always has been, and always
will bo, an actual expense attached to the collection of country
checks.
Possibly this expense may be reduced under the clear
ing methods of the future just as it has been reduced in the
past, but there is no doubt that many banks have been deceiving
themselves into thinking that they are put to no expense in
the collection of their country checks, while an analysis .
would show in many cases that banks pay this expense indirectly
by carrying balances Tilth collecting bonks that might be more
profitably employed otherwise, and that they are really paying
more for a collection service than other banks who meet the
expense face to*face and settle it as it accrues.
Reserve Bank is a purely mutual organization.
A Federal
Its depositors
are its stockholders and its borrowers aro ell stockholders.
Each Federal Reserve Bank should hold itself ready to serve
each one of its limited number of depositors as far as it can
±002
-
611
3-
with safety to itself and with justice to its other depositor
stockholders.
Should any member hank desire to discontinue '
national hank reserve accounts that it has been carrying and
rsk a Federal Reserve Bank for the same collection facilities
that had been extended by the Rational Bank reserve agent, such
service should, without hesitation, be extended by the Federal
Reserve Bank;
not, however, at a loss to itself, which would
be unfair to its other stockholding banks, but at cost or as
near to cost as practicable.
If the member bank which has been
in the habit of counting as reserve, items in transit to its
national bank reserve agent, desires the same privilege as to
items sent to Federal Reserve Banks, it should be granted.
But the Federal Reserve Bazik should analyze each account m
order to determine the average amount of outstanding items or
float that it has permitted the member bank to count as reserve,
and it Should charge interest upon whatever amount of the opparent reserve cairied is found to be made up of checks m
transit.
The actual cost of collection should ^lso be ascer
tained and the proper allowance mad* for overhead charges.
A
statement of all this should be rendered the member bank once
a month and the resulting charge made against its account.
Ihe Federal Reserve Bank should give full service to the member
bank, including checks on state banks and tiust companies and
1003
611 .
-4
checks drawn on other banks m
other districts, but it should
require as a condition precedent, that each mcniber bank sending
checks for credit should agree that checks upon it may be
charged against its account with the Federal Reserve Bank,
immediately apon receipt by the Federal Reserve Bank, as a
matter of convenience;— but on the books of the member bank as
a matter of course, not until the member bank had received the
items.
In the analysis of the account to be made daily hnd
rendered monthly by the Federal Reserve Bank, allowance should
be made m
time m
computing the float against a member bank of the
transit to it of items charged against its account on
the books of the Federal Reserve Bank.
By following these principles, which are based merely
upon the idea 6f adequate service vith a compensating charge,
the Federal Reserve Banks will gradually assume for their mem
bers the burdezi of collecting out of torn checkSi
But it is
not anticipated that the change will take place so rapidly as
to embarrass the Federal Reserve Banks physically or otherwise.
The actual cost which must be met frankly *nd 7hich cannot be
disguised or diluted, will no doubt appear high at first, and
will cause many member banks to be slow to use Federal Reserve
Banks as collecting agencies;
but the fact that balances with
Federal Reserve Banks count as reserve while those v/ith other
\
611
banks will not, will be a powerful leverage in the long run,
and assuming that each member bank that uses its Federal Re
serve Bank as a collecting agent will be required to permit the
chafcge of checks on it against its account at par, it follows
that the cost of handling items by a Federal Reserve Eank will
be reduced from time to time as one member bank after another
uses the Federal Reserve Bank as a reserve correspondent and
collection agent*
banks, —
Those who deposit checks with the member
the public —
are already in many instances, owing
to close competition between bonks, getting free service,
others may be paying by carrying free balances, while still
others may be subjected to direct and sometimes excessive
charges.
But it is evident that as member banks are enabled
to collect out of town checks at a reduced cost, this benefit
will inure, in
tb p
last analysis, to their customers*
Bo not
get away from the fact however, that the problem of collecting
country checks with which the Federal Reserve Banks are con
fronted, is not one which has to do directly with the public,
but concerns primarily the member banks.
of banking practice;
It is purely $ matter
it should.be worked out on the basis of
adequate service and proper compensation for service rendered.
Washington, B. C.
Apr^l 15, 1916.
1005
612
T R E A S U R Y
D E P A R T M E N T
WASHINGTON
April 12, 1916*
Hon. C. S. Hamlin, Governor,
Federal Reserve Board.
Sir:
Your letter of the 10th instant is received in which you say,
"There is some apprehension on the part of the Federal
Reaseve Bank of Philadelphia because of the fact that
instructions were at some time given to the Assistant
Treasurer at Philadelphia to pay withdrawals of funds
held by the Federal Reserve Bank of Philadelphia in
the Gold Settlement Fund in 'any available funds1.n
You ar9 advised that such instructions were recently wired
for the purpose pf facilitating the payment, and not of changing
the kind of funds payable on such transactions.
It is the understanding of this office that all'deposits to
the credit of the Gold Settlement Fund are to be made in gold,
gold certificates or gold order certificates, and that all pay
ments under the said fund shall, where gold is available at sub
treasuries, be paid in gold or its equivalent,* and that in case
such funds are not available, shipments thereof will be made at
the expense of the Gold Settlement Fund for such payments.
Respectfully,
JOHN BURKE,
Treasurer.
J .0.14
616
DEPARTMENT OF JUSTICE,
Washington.
April 14, 1916.
Sir:
At the request of the Federal Reserve Board, you have
submitted the following questions for my opinion:
1.
Can the Federal Reserve Board legally change
the present location of any Federal reserve
bank:
(a) In the case where there has been no
alteration in the district lines, and
(b) In the case where there has been such
readjustment of district lines as in the
opinion of the Board necessitates the desig
nation of a new Federal reserve city in
order that due regard may be given to the
convenience and customary course of business
as required by Section 2 of the Federal. Re
serve Act?
11.
Must the Federal Reserve Board, in exercising
its admitted power to readjust, preserve the
$4,000,000 minimum capitalization required
of each Federal Reserve bank as a condition
precedent to the commencement of business?
1.
In my opinion of November 22, 1915, I expressed the view
that the "Federal Reserve Act" does not confer on the Federal
Reserve Board the power to abolish any of the existing Federal
reserve banks or Federal reserve districts.
I believe that
the reasoning of that opinion is equally applicable to both
branches of the first question now submitted.
Section 2 of the Federal Reserve Act provides:
As soon as practicable, The Federal Reserve
Bank Organization Committee shall designate not
less than eight nor more than twelve cities to
he known as Federal reserve cities, end shall
divide the continental United States * * * into
districts, each district to contain only one of
such Federal reserve cities. The determination
of said organization committee shall not be sub
ject to review except by the Federal Reserve
Board when organized: Provided. That the dis
tricts shall be apportioned with due regard to
the convenience and customary course of business
and shall not necessarily be coterminous with
any State or States, The districts thus creat
ed may be readjusted and new districts may from
time to time be created by the Federal Reserve
Board, hot to exceed twelve in all. Such dis
tricts shall be known as Federal reserve dis
tricts and may be designated by number. * * *
Said organization committee shall be
authorized * * * to make such investigation as
may be deemed necessary by the said committee
in determining the reserve districts and in
designating the cities within such districts
where such Federal reserve banks shall be sever
ally located.
The same section further provides:
The said committee shall supervise the organi
zation in each of the cities designated of a Feder
al reserve bank, which shall include in its title
the name of the city in which it is situated, as
"Federal Reserve Bank of Chicago."
Since the Act thus provides that each city designated
as a Federal reserve city is to be the location of a Federal
reserve bank, it follows that a change in the location of a
Federal reserve bank would in effect be the designation of
a new Federal reserve city and the abandonment of one pre
viously designated.
I find no more warrant in the Act
for the abandonment of one Federal reserve city and the
designation of a new one than I do for the abolition of a
Federal reserve district when once established.
The power to designate a new Federal reserve city
(twelve cities having been named by the Organisation Com-
1008
616
-3 -
mittee), or to change the location of a Federal reserve
hank, is not expressly conferred hy the Act on the Federal
Reserve Board.
If the Board possesses such power it is
only hy implication from the provision that—
The determination of said organization com
mittee shall not he subject to review except hy
the Federal Reserve Board when organized; Provided.
That the districts shall he apportioned with due
regard to the convenience and customary course of
business and shall not necessarily he coterminous
with any State or States. The districts thus creat
ed may he readjusted and new districts may from
time to time he created hy the Federal Reserve
Board, not to exceed twelve in all*
In my opinion there is no clear indication, either in
the provision just quoted or elsewhere in the Act, of an in
tent to confer on the Federal Reserve Board the power to
change the location of Federal reserve hanks hy the designa
tion of new Federal reserve cities.
On the contrary, there
are indications of an opposite intent.
As stated in my
opinion of November 22, 1915, above referred to>*tt
The merely negative statement that the determi
nation of the Organization Committee "shall not he
subject to review except by the Federal Reserve
Board when organized" clearly cannot he enlarged
into an affirmative grant of power to the Board to
review and set aside everything done hy the Organi
zation Committee, The reasonable view is that by
that language Congress meant that the determination
of the Organization Committee should not he subject
to review at all, except in so far as the subsequent
provisions specifically authorize a review hy the
Federal Reserve Board. The only subsequent provision
authorizing a review of the determination of the
Organization Committee hy the Federal Reserve Board
is contained in the sentence—
"The districts thus created may be readjusted
and new districts may from time to time he created
hy the Federal Reserve Board, not to exceed twelve
in all."
Again, as stated in that opinion,—
"A reading of the Act shows at once that the
Organization Committee was created not merely for
the purpose of attending to the formalities of organi
zation or to serve as a stop-gap until the Federal
1009
616
-4 -
Reserve Board should come into existence, but
that it had an independent function to perform
and to that end was invested with wide powers.
That is to say, its function was to organize
the system as contradistinguished from the func
tion of the Federal Reserve Board, which was
primarily to administer the system.
The duty of designating Federal Reserve cities belonged
to the Reserve Bank Organization Committee as a part of the
organization of the system, and the Committee was required
by the Act to designate not less than eight nor more than
twelve cities.
This duty is named first among those imposed
upon the Organization Committee, and it is imposed by the
same provision of section 2 which required the Committee to
divide the United States into Federal Reserve districts.
The same considerations that indicate an intention that the
several districts should be permanent would also indicate
that the designation of the cities was not to be made for
temporary purposes, but was intended to be permanent, subject,
of course, to change by Congress,
The designation was to
be made only after thorough investigation> and the same
machinery was provided to facilitate both the determination
of the districts and the designation of the cities.
Thus,
Section 2 provides:
Said Organization Committee shall be authorized
to employ counsel and expert aid, to take testimony,
* * * and to make such investigation as may be deemed
necessary * * * in determining the reserve districts
and in designating the cities within such districts
where such Federal reserve banks shall be severally
located.
In my opinion, this coupling of the duty of determining,
the districts with the duty of designating the Federal reserve
cities within the several districts shows an intention on the
part of Congress that the cities so designated are to con
stitute the fixed centers in the scheme or system of division,
1.010
-5-
616-
the duty of designating the cities being coordinate
with the duty of forming districts around them.
It
was left to the discretion of the Organization Commit
tee whether it should designate the full number of
Federal reserve cities and establish the full number
of Federal reserve districts permitted by the Act.
The committee elected to designate and establish the
full number authorized, thereby practically suspending
the operation of the provision of the Act that "new
districts may from time to time be created by the Federal
Reserve Board not to exceed twelve in all. "
The prim
ary if not the only purpose of that provision must have
been to take care of the situation in the event that
the Organization Committee had designated less than
twelve Federal reserve cities.
The fact that the Federal Reserve Board, aside from
the provision relating to the creation of new districts
from time to time, was merely given the power to "readjust"
districts suggests that there was to be some permanent
characteristic or element in the districts created by
the Organization Committee.
If, however, in addition
to the power which the Federal Reserve Board has of
readjusting districts by changing their boundary lines,
it also possessed the power to change the location
of the respective Federal reserve cities within such
districts, then the Board could, by successive changes
±011
6i6
- 6 of cities and boundaries, entirely obliterate existing
districts and substitute in their place new districts to
tally different from those created by the Organization Com
mittee.
X do not think that Congress intended to confer such
a power.
The Act provides that each Federal reserve bank is to
include the name of the city in which the bank is located.
By Section 4 it is provided that the organization certifi
cate of each bank shall state specifically - The name of such Federal reserve bank, the ter
ritorial extent of the district over which the opera
tions of such Federal reserve bank are to be carried
on, the city and State in vhich said bank is to be
located, the amount of capital stock and the number
of shares into vhich the same is divided * * *.
Upon the filing of such certificate with the Comptroller
of the Currency in the manner prescribed, such Federal reserve
bank - shall become a body corporate and as such, and in the
name designated in such organization certificate, dhall
have power - * * * * * *
have succession for a period of
twenty years from its organization unless it is sooner
dissolved by an Act of Congress, or unless its franchise
becomes forfeited by some violation of law. (Sec. 4.)
It is to be noted that there is no provision in the Act
by which the Federal Reserve Board may change the name of a
Federal reserve bank or amend its certificate in this re
spect.
The whole tenor suggests permanency.
The omission of Congress to grant, by express language,
the power to change Federal reserve cities is significant,
especially in view of the language of Section 11 (e) of the
Act, which confers the power - -
±013
-7
■616'
To add to the number of cities classified
as reserve and central reserve cities * * *; or
to reclassify existing reserve and central re
serve cities, or to terminate'their designation
as such.
It would have been equally easy, had Congress de
sired to grant the authority to designate new Federal
reserve cities, to have said so in express terms. (Tillson v. United States . 100 U. S., 43, 46, quoted in my
opinion of November 22, 1915, supra.)
It may be suggested that changes in the "custom
ary course of business" or other changes not foreseen
by the Organization Committee may result in inconven
iences which the Federal Reserve Board cannot remedy if
its power to change the location of Federal reserve cit
ies is denied.
The answer is that the remedy is with
Congress, in so far as it
may not already be supplied
by Section 3, which authorizes the establishment of as
many branch banks in any district as
may be found ex
pedient.
To sum up my conclusion on the question of whether
the Federal Reserve Board can legally change the present
location of any Federal reserve bank, I am of opinion
that the Board has no such power, and that such power is
lacking whether there has been an alteration or readjust
ment in the district lines or not.
1013
*
6i6
-
8 -
I I .
Coming now to the consideration of the second question
submitted, namely; whether the Federal Reserve Board; in
exercising its admitted power to readjust; must preserve
#
the $4;000;000 minimum capitalization required of each Fed
eral reserve hank as a condition precedent to the commence
ment of business, I am of opinion that this question is to
he answered in the negative*
The Federal Reserve Act provides in Section 2:
No Federal reserve hank shall commence
husiness with a subscribed capital less than
$4;000;000.
The some section also contains a provision requiring
subscriptions to the capital stock to be paid - One-sixth * * * * on call of the Organization
Committee or of the Federal Reserve Board; onesixth within three months and one-sixth within
six months thereafter; and the remainder of the
subscription; or any part thereof; shall be subiect to call when deemed necessary by the Federal
Reserve Board * * * .
Section 4 contains the following provision:
When the minimum amount of capital stock
prescribed by this Act for the organization of
any Federal reserve bank shall have been sub
scribed and allotted, the organization commit
tee shall designate any five banks * * * * to
execute a certificate of organization * * * * .
Upon the filing of such certificate with
the Comptroller of the Currency the said Federal
reserve bank shall become a body corporate.
The decrease of capital stock is authorized by the fol
lowing provision
of Section 5 5
The outstanding capital stock shall be
increased from time to time as member banks
increase their capital stock and surplus or
as additional banks become meinbers, and may
be decreased as member banks reduce their
capital stock or surplus or cease to be members.
1014
%
6l6
-
9
-
Additional provisions relating to the decrease of
capital stock are found in Section 5 and 6, as follows:
Sec. 5 . * * * * VJhen a member bank reduees its
capital stock’it shall surrender a proportionate
amount of its holdings in the capital of said
Federal reserve bank, and when a member bank volun
tarily liquidates it shall surrender all of its
holdings of the capital stock of said Federal re
serve bank and be released from its stock subscrip
tion not previously called.
In either case the
shares surrendered shall be canceled and the mem
ber bank shall receive in payment therefor * * *
a sum equal to its cash-paid subscriptions on the
shares surrendered * * * less any liability of
such member bank to the Federal reserve bank.
Sec. 6. If any member bank shall be declared
insolvent * * * the stock held by. it in said Fed
eral reserve bank shall be canceled * * * and all
cash-paid subscriptions on said stock, with onehalf of one per centum per month from the period
of last dividend, not to exceed the book value
thereof shall be first applied to all debts of
the insolvent member bank to the Federal reserve
bank, and the balance, if any, shall be paid to
the receiver of the insolvent bank. Whenever the
capital stock of a Federal reserve bank is reduced,
either on account of a reduction in capital stock
of any member bank or of the liquidation or insol
vency of such bank, the board of directors shall
cause to be executed a certificate to the Comp
troller of the Currency showing such reduction of
capital stock and the amount repaid to such bank.
In Section
9
it is provided:
If at any time * * * a member bank has failed
to comply with * * * the regulations of the Federal
Reserve Board, it shall be within the power of the
said board, after hearing, to require such bank to
surrender its stock in the Federal reserve bank;
* * * * and said Federal reserve bank shall, upon
notice from the Federal Reserve Board, be required
to suspend said bank from further privileges of
membership, and shall within thirty days of such
notice cancel and retire its stock and make pay
ment therefor in the manner herein provided.
It will be observed from the foregoing quotations
that the Federal Reserve Act expressly provides that no
Federal reserve bank shall commence business with a sub-
1015
scribed capital of less than $4,000,000. ( Sec. 2. )
They were each to be organized when the minimum amount
of capital stockhad been subscribed. ( Sec. 4).
Only
Jt
three-sixths of the capital subscribed is required
to
>W
be paid in, the remainder being left " subject to call
when deemed necessary by the Federal Reserve Board. "
(Sec. 2. )
The Actt specifically provides for the decrease of
capital stock (l)
as member banks reduce their capital
stock; and (2) as they cease to be
members. ( Sec. 5.)
Member banks may cease to be members for any of
four causes - |a) Voluntary liquidation (Sec. 5);
(b) Insolvency ( Sec. 6);
(c) Violation of regulations of Federal Reserve
Board (Sec. 9 );
(d) Transfer from one Federal district
to another through readjustment
of districts (Sec. 2).
The Act specifically .requires the cancellation of
capital stock where membership ceases under (a), (b) or
(c).
Secs. 5, 6 and 9 .)
No specific provision is made for cancellation of
capital stock where membership ceases under
(df).
While the minimum Capital had to be subscribed in
order to comroence business, the maintenance of that minimum
is nowhere prescribed by the Act.
The fact that the
Board is to determine whether more than half the subscrip
tion is to be paid in seems to indicate that the minimum
to be subscribed was fixed as a precaution to make sure
that ample credit should
of the system.
be pledged to insure the success
Not only is the maintenance of the minimum not pre
scribed, but express provision is made for reducing the
capital stock as, or whenever, member banks "cease to be
members."
This language is general and includes in its
terms all cases in which member banks cease to be members,.
It is coupled with no expressed condition that the mini
mum capitalization be preserved; and since the Federal Re
serve Act required the organization of the Federal reserve
banks upon the subscription of the minimum, it is obvious
that any reduction whatever made after commencing business
might reduce the capital below the minimum.
It is plain that a member bank can be a member only of
the Federal reserve bank of the district in which both are
located.
This is obvious from the nature of- the Federal re
serve districts and is assumed in Sections2, 4 and 9*
Of
necessity, therefore, when the Federal Reserve Board, in
the exercise of its power to readjust, transfers a member
bank from one district to another, such transferred bank
must cease to be a member of the Federal reserve bank of
the district from which it is transferred.
When it thus
ceases to be a member> the capital of the Federal reserve
bank may be reduced; and there is nothing in the Act requir
ing the reduction to be made subject to the maintenance of
a minimum capital.
It is to be noted that Section 5 provides that the
capital stock shall be increased and may be decreased under
the conditions
therein mentioned.
of Sections5^ 6 and
Succeeding provisions
however, make it clear that may is
here used in the sense of shall, as applied to cases aris-
VJk w
1017
ing under (a), (b) and (c).
It seems reasonable to
infer that it is used in the same sense as applied to
(d).
But whether so used or used in its more literal
sens® is here inmaterial, for so far as the answer to
the question submitted is concerned; the result is the
same whether the Board is required or merely authorized
to reduce the capital when member banks cease to be
membe rs.
Nor can any significance be attached to the fact
■that specific provision is made for reducing the capi4
tal stook of a Federal reserve bank in cases arising
under (a), (b) and (c), while the Aot is silent as to
cases arising under (d).
The cases specifically pro
vided for include cases where the member banks cease to
be members as. the direct result of their own acts or
conduct,
Cases under (d) arise where banks cease to be
members as an incident of the exercise of the power of
the Federal Reserve
Board to readjust districts.
The
grant of the specific power to readjust carries with it,
as fully as if expressed in the Act, the power to do
what is.necessarily incidental.
ed«, 505j
(Broomfs Maxims; 7th
I9d U. S, 12.)
My conclusion as to the second question submitted
is that the Federal Reserve Act, in prescribing a mini
mum capitalization of $4,000,000 for Federal reserve banka
as a condition precedent to commencing business, does
not require that such minimum capitalization shall be
preserved under the circumstances.
Very respectfully,
T. W. GREGORY.
Attorney General,
Tho President,
The White House.
4/15/16
W. P. G. HARDING. GOVERNOR
PAUL M. WARBURG. VICE GOVERNOR
FREDERIC A. DELANO
ADOLPH C. M ILLER
CHARLES S. HAMLIN
E x -O f f i c i o m e m b e r s
W ILLIAM G. McADOC
SECRETARY OF THE TREASURY
CHAIRMAN
JOHN SKELTON W ILLIAM S
COMPTROLLER OF THE CURRENCY
H. PARKER W ILLIS . SECRETARY
SHERMAN P. ALLE N . ASST. SECRETARY
a n d F is c a l a g e n t
FEDERAL RESERVE B O A R D
WASHINGTON
REPLY TO
FEDERAL RESERVE BOARD
A p r il
15j
1916*
SIR:
About a year ago the Federal Reserve Board forwarded
to each Federal Reserve Bank a form of stock certificate with
the suggestion that though each hank could properly have its
own certificates prepared in any form it desired nevertheless
it might he advisable for the various reserve banks to issue
uniform stock certificates to their member banks. The whole
question was subsequently postponed when the Bureau of Internal
Revenue ruled that stock certificates of Federal reserve banks
would be subject to the War Revenue stamp tax.
In view of the fact that the Attorney General has since
filed an opinion to the effect that Federal reserve bank stock certif
icates are exempt from the stamp tax,, the Board has caused the
Bureau of Engraving and Printing to prepare a design of stock
certificate, the body of which is substantially similar to that
submitted a year ago.
Slight changes in wording and arrange
ment have been made in accordance with various suggestions.
The Bureau of Engraving and Printing has made an esti
mate of $1,017.53 for "the engraving of 24,000 of these certifi
cates bound in bock form,'of 503 each, with stubs attached. On
the basis of an order aggregating 24,000 certificates each Fed
eral Reserve Bank can obtain 2,000 certificates for $84-50- The
plate once engraved, future orders will undoubtedly be at even a
less figure.
The enclosed copy has been prepared by Counsel after a
careful consideration of the various suggestions made to the
Board and in substance represents the concensus of vie1,vs express
ed by the several Federal Reserve Banks and members of the Board.
Because of the desirability of haang all certificates alike it is
hoped that you may see fit to adopt this form for your bank though
there is, of course, no obligation upon you to do so.
If satisfactory, please advise the Board as soon as
possible of the number of certificates desired so that the plate
may be engraved at once.
Respectfully,
Assistant Secretary.
6 1 8 .
MEMORANDUM
OF THE GENERAL PRINCIPLES TO BE FOLLCTSED
IN THE PREPARATION OF A CHECK CLEAR
ING AND COLLECTION PLANWashington, D. C. April 17, 1916*
Introductory
The Federal Reserve Board has no plan and has no
wish to suggest to the Governors of the Besiks any specific "Plan".
It considers that this is a problem for the Executive Officers of
the Federal Reserve Banks to work out* However, m working out
their plan, the Governors should been: in mind and adhere to the
following general propositions:
First;
It is to be noted that by May 16, 1917, a large part of
the National bank reserves will have been transferred, and that
by November, 1917* the final transfers will have been made*
By that date, at the latest, each Federal Reserve Bank must
be in readiness to render for its member banks the service of
check clearing and collection*
This, however, does not mean
that any Federal Reserve Bank is expected or required to ren
der this service without charge or for less than cost*
Seconds
While the opinion of the Attorney General has not yet
been rendered, informal talks with memberb of his Staff seem
to indicate that that office regards the language of Section
16 of the Act, m which the following phrase is used:
1020
-2 -
—618—
i
"Every Federal Reserve Bank shall receive
on deposit at par from member banks or from Fed
eral Reserve Banks, checks and drafts drawn upon
any of its depositors, "
as meaning that these checks must be credited upon receipt, at
full face valut,.
It docs '‘ot necessarily folio v, however, that
Federal Reserve Banks would permit items thus credited to be
drawn against until collections had been made, and if they did
permit their being drawn against in anticipation of collection,
that they would not be fully entitled to charge the cost of
collection, interest on the funds advanced, etc.
Third:
It is expected that every Federal Reserve 3ank will
approach this sub]ect from a purely practical, rather
than a theoretical standpoint and will, so far as prac
ticable, adhere strictly to the banking practices which
the last fifty years have developed. The Federal Reserve
Board has no desire to compel member banks to do their
check clearing and collection through the Foderal Re
serve Banks, but it does expect the Federal Reserve
Banks to offer this service to their member banks on
substantially as favorable terms as the larger banks
of the big cities, heretofore acting as reserve agents
for their country bank clients. A system of chock clear
ing whicn might be perfectly satisfactory m theory,
but under which no business /oula be deno, could
hardly be considered as a satisfactory solution of
the problem.
1021
618.
-3-
Fourth:
It follows from the foregoing that the Board does not
contemplate the adoption of a plan which 3hall he mandatory or
compulsory upon the member banks of the Federal Reserve System.
The Board will, however., require each Federal Reserve Bank to
establish, .within the near future, for such .of its member banks
as desire to avail themselves cf it; a system of check closuring
and collection at least comparable with that in general use
in the country; that is shall analyze carefully the cost of
its service and charge these members the actual cost of the
servico rendered
&2Q
Washington, D. C.,
March 15, 1916•
I must apologize for not 'sooner having answered your letter con
taining the clipping from the Boston Transcript by Mr. Arthur Stanwood Pier,
entitled "Wilson*3 Muzzle for Americans,11 and in this tardy reply I shall
endeavor to eliminate all personal feelings and devote myself to the nation
al aspects of the matter.
Mr. Pier is evidently deeply offended because the United States
will not give up its time honored position of neutrality and intervene in
the war now going on between the great powers of Europe.
He seems to
think that it was the duty of the United States to protest when Belgium was
entered by Germany, and that if we were fulfilling our duty we would new
be at war with Germany, joining the Allies.
So far as the violation of Belgium neutrality goes, it would be
sufficient te say that Germany did not violate the Hague Convention when
it entered Belgium, for prior to entry it delivered an ultimatum tc Belgium
equivalent to a declaration of war.
This fulfilled, absolutely, all re
quirements laid down by the Hague Convention.
Germany, however, did
violate the treaty of 1839 which Prussia signed with Austria, Russia,
England and Prance, and which provided for the neutralization of Belgium.
The United States, however, was not a party to this treaty, and,, there
fore, it could not, consistent with neutrality, protest against its viola
tion.
To have protested would have been equivalent to giving up neutrality
and siding with the Allies.
X am aware that Senator Root, in his recent speech in Hew York,
and Ex-President Roosevelt, have both recently contended that the United
States should have protested because ef the alleged violation tf the Hague
Cinventien.
In answer te this, however, it is sufficient tj point out
that Senator Root was in the Senate when Germany entered Belgium, and, sd
far as l know, never protested or never introduced any resolution of protest
ner did any other member of the Senate or the House.
Furthermore, shortly
after this entry, Ex-President Roosevelt, in public interviews and in a
magazine article, made it perfectly clear that he did not believe that the
1023
United States should protest against this action of Germany.
For example,
four days after the invasion of Belgium, in a speech in ®ew York, he stated
that "we should be thankful beyond measure because we are Americans and not
at ■war."
He further urged support of the Administration in securing peace
and justice.
He said nothing of any duty to Belgium.
Again, at Hartford, Conn., on August 15, 1914, he discussed the
Bryan peace treatiesbut said nothing about any ebligation under the Hague
treaties.
Again, seven weeks after the Belgium invasion, he printed, in the
Outlook, on September 25, 1914, an elaborate article on the war, with long
discussions of this Belgium phase.
In this article he states that there
is even a possible question whether we are not, ourselves, like other neu
tral powers, violating obligations which we have explicitly or implicitly
assumed in the Hague treaties, but adds that, under actual conditions
this Hague guarantee would excite laughter were not the tragedy such as to
move us to tears instead.
In another part of the article, however, he deals directly with
the question of our duty to intervene because of the German invasion of
Belgium.
Here is what he says:
'•A deputation of Belgians has arrived in this country to
invote our assistance in the time of their direful need. What
action our Government can or will take, I know not.
It has been announced that no action can be taken that
will interfere with our entire neutrality.
It is certainly
eminently desirable that we should remain entirely neutral, and
nothing but urgent need would warrant breaking our neutrality
and taking sides one way or the other.* * *
Of course, it would be folly to jump into the gulf our
selves to no good purpose, and very probably nothing we could
have done would have helped Belgium. We have not the smallest
responsibility for what has befallen her, and I am sure that
the sympathy of this country for the suffering of the men,
women and children of Belgium is very real.
nevertheless this synpathy is compatible with full ack
nowledgment of the unwisdom of uttering a single word of official
pKitest unless we are prepared to make that protest effective;
and only the dearest and most urgent national duty would ever
justify us in deviating from our rule of neutrality and nontoterferenee.*
Furthermore, Ex-President Taft, in a speech at Morristown, H. J.,
publicly expressed his full concurrence in the attitude of President
Wilson
1024
620
-3*»
Even, hovrever, if the Hague- Convention had teen violated, it
would hate imposed no duty on any. nation which had signed the treaty to
protest unless its interests were injured by the act.
For example, none
of the signers of the Hague Convention protested when Austria-Hungary
assumed sovereignty over Bosnia and Herzogovina in 1908, nor did any of
them protest when Italy siezed Tripoli in 1911.
Nor did the British
Government protest because of any violation of the Hague Convention of
190?, for it had never ratified it; its protest and action were based upon
the violation of the treaty of 1839, to which, as I have said, the United
States was not a party.
I may add, also, that if the United States was
bound to protest at the Belgium invasion, it was equally bound to protest
at the invasion of Luxemburg by Germany, for Luxemburg also was neutralized
by the treaty of London in 1867, to which Prussia, and the other nations
now at war were parties.
I think, on reflection, you will see what a position the Presi
dent of the United States would have been in if, as the official head of
one hundred million people, without any action on the part of Congress, he
had protested to Germany*
Supposing Germany replied that we were not
affected and that, in short, it was none of our business*
The President
then would have had to back up that protest with force, which he could not
do without the authority of Congress, and which we could not possibly do
because of our unpreparedness, even if Congress had advocated such a course.
Can you not see what a humiliating position this would have placed the
United States in?
President Wilson, however, soon after the outbreak of the war,
offered his services as a mediator, - the Hague Convention providing that
such an offer should not be considered an unfriendly act, - but neither
party availed itself of this offer.
Our country has always proceeded on the theory of keeping out of
to Europe, you must keep your hands off the New World, and then follows
the necessary corollary * we must keep our hands off of Europe unless we
are directly injured by the act of some belligerent.
This is well brought
620
-4 -
out in the declaration attached by the Unitea States Senate t» m e of the
most important Hague Convention treaties.
This declaration read as
follows;
"Nothing contained in this convention shall be so con
strued as to require the United States of America to depart
from its traditional policy of not intruding upon, inter
fering with or entangling itself in the political questions
of policy of any foreign State; n«r shall anything contained
in the said convention be construed to imply a relinquishment
by the United States of its traditional attitude toward
purely American questions."
This would seem to be a clear and explicit statement of the
policy of the United States.
It has bound us in the past and I trust it
will always be our rule of action in the future.
If by protesting we were drawn into the war on the side of the
Allies, against Germany, it would not only violate the established policy
of the United States, but it would lay the foundation for a repudiation
by foreign nations of the ilonroe Doctrine.
A nation can observe neutrality only when its Government treats
all belligerents alike.
That has been President Wilson's endeavor
throughout, and that attitude naturally prevented the Government of the
United States, as it has prevented that of Spain, Switzerland, Holland,
Denmark, Norway, Sweden, and the iatin-American Republics, from making
any official protest or interfering in any way in this unfortunate war.
Whenever Germany has injured the United States, or its people,
by a violation of International Law, President Wilson has been quick to
demand redress.
How far he has been helped by Congress in this atti
tude you can gather from recent events in that body.
In any event, I
think you will agree with me that the President has no right; by any
official act, te put the United States in any other p*sitisn than that
of a strict neutral, without the direct authority of Congress, in which
body is vested the right to declare war, and a violation of neutrality
under these circumstances would be equivalent to a declaration of war.
Mr. Pier also claims, in his article, that President Wilson
should have protested against the atrocities in Belgium.
It would seem,
hswever, to be clear that no President, or country, should over protest
1025
,1026
020
5-
against actions in any foreign country without f i r s t making1an independ
ent investigation for itself by sending a com m ission, or otherwise} for
however clear the atrocities may seem, it.should never he forgotten that
evidence should be taken on both sides of the controversy before any
action is taken.
Por example, President Cleveland notified the British
Government that its acts in Venezuela were in violation of the Monroe
Doctrine, but he was careful to state that he should appoint an inde
pendent commission to investigate the whole matter and report, and that
then he should sustain the report of said commission with all the
authority *f the United States.
There seems to be a feeling that President Wilson has, by
failing to protest against the atrocities in Belgium, in some way changed
the traditional policy of the United States.
It would seem t* be a
sufficient answer to this to point out that between 1901 and 1909 when
Mr. Roosevelt was President, and, during the greater part of which time,
Mr. Soot was in the cabinet, there occurred various atrocities abroad.
Por example, in 1903 occurred the terrible massacre at Kishineff.
At
the same time Macedonia was running red with blood; in 1905 the horrors
of the Congo were revealed.
In the same year Korea was absorbed by Japan, although the
United States had entered into a treaty with Korea promising to use its
best efforts in case Korea was unjustly treated by any power.
Ex-Presi
dent Roosevelt, in the Outlook for September 25, 1914, among ether things,
writes the following with Regard to Korea:
•’Korea is absolutely Jaxoan’s.
To be sure, by treaty it
was solemnly covenanted that Korea should remain independent.
But Korea was itself helpless to enforce the treaty, and it was
out of the question to suppose that any other nation with no
interest of its swn at stake would attempt to do for the
Koreans what they were utterly unable to do for themselves.
Moreover, the treaty rested on the false assumption that Korea
could govern herself well.
It had already been shown that
she could not in any real sense govern herself at all.
Japan
could not afford to see Korea in the hands of a great foreign
pswer. She regarded tyer duty to her children and her children's
children as overriding her treaty obligations.
Therefore,
when Japan thought the right time had come, it calmly tore up
the treaty and took Korea, with the polite and businesslike
efficiency it had already shown in dealing with Russia, and
was afterwards to show in dealing with Germany.
The treaty,
620
1037
-6 -
■when tested, proved as utterly worthless as our own recent
all-inclusive arbitration treaties - and worthlessness can
go no further#”
In 1906 Morocco was parceled out, and in the sane year occurred
the terrible Russian massacre.
In 1909 wo had the Armenian horrors.
All of these terrible events occurred during Republican Admin
istrations, yet, to my knowledge, no official protest was ever made,
either by the President or by Congress.
May I also point out to those claiming that the unwarranted
death of a single American demands an immediate declaration of war, that
President Grant, in the Virginius case, accepted an indemnity from
Spain for the brutal murder, without trial, of a large number of Americans
In Cuba.
Mr. Pier, in his article, makes the surprising statement that
chivalrous feeling caused the United States to take sides with the Cuban
revolutionists.
Even a limited knowledge of history would be sufficient
to satisfy anyone that the United States interfered in Cuba primarily
for the reason that its own interests were deeply affeoted by the terri
ble conditions in that island.
Cuba is within the sphere of influence
•f the United States, and, furthermore, eur citizens were deeply affected
by the incidents there.
In this connection let me say that I have recently read a
pamphlet prepared by Sr. Morton Prince, wh* severely criticises President
Wilson for not protesting against the German entry into Belgium, and
citing the faot that President Monroo, in a message in 1821, expressed
the hepe that the Greeks, who were then struggling with the Turks for
independence, might be successful.
Dr. Prir.ce also cites the fact that
Daniel Webster, at that time in the House of Representatives, made a
strong speech in behalf of Greek independence.
It is a faot that President Monroe, in one of his annual
i
messages, expressed the personal hope that the Greeks would succeed, but
no resolution was passed in Congress or the slightest assistance given
to the Greeks in their valient fight.
It is true that Daniel Webster
introduced a resolution providing for sending a commission to Greece to
1088
620
investigate conditions, and that he, in a strong speech upon this reso
lution, expressed the deepest sympathy with the Greeks.
It is a fact,
however, that Mr. Webster never asked for a vote on this resolution; on
the contrary, he expressly asked that it be laid on the table.
He intro
duced it merely as a basis for a speech, and, as a fact, as I have stated,
no expression of sympathy or aid to Greece was given by Congress.
Ur. Webster's feeling as to the duty of the United States to
maintain neutrality can be vrell illustrated in another case; that of the
Hungarian rebellion in 1850.
Yon will remember that Kvssuth had fled to
Turkey, and that he was brought to America on a United States warship.
He
was received everywhere with acclamation, and every attention was paid to
him personally, but Congress passed no resolution of sympathy, nor did it
aid him in the slightest degree in his efforts.
On the contrary, the
President told Kossuth that he could do nothing for him.
Web3ter and
Clay told him the same, which made him deeply indignant.
Mr. Webster, in writing about this, said to a friend that if
Kossuth should speak to him of the policy of intervention "I shall have
ears more deaf than adders".
In conclusion, let me say that, so far as I can find, our Govern
ment has never protested at the conduct of nations abroad engaged in war when
that conduct did not directly injure us.
neutrality.
Our policy has been that of
We demand that foreign nations shall keep their hands off of
»ur continent, and, as I have said, the necessary corollary of this is that
we must keep out of interference with their affairs.
This has been the
policy laid down by Washington, Jefferson, Adams, Ilonrne, and by every other
President of the United States, including President Wilson, and I must ex
press the firm conviction that it will prove an unhappy day for the United
States if ever we shall reverse that policy.
-1
Very sincerely yours,
-ft
f ) 0 0
i ' :- v i ' r ' W
622
THE
BANKER
AND
THE
PUBLIC
Address of M ILTON C. ELLIOTT
To be delivered at meeting of Texas Bankers Association
at Houston, Texas - May the 2d.
-OoO-
MR. PRESIDENT AND MEMBERS OF THE TEXAS BANKERS ASSOCIATION:
One of the incidental benefits that may be said to have re
sulted from the passage of the Federal Reserve Act is that it has
awakened both the banker and the public to a realization of the
true relations that exist between them.
The banker in studying
the
whys and wherefores of this legislation has necessarily viewed the
subject Of banking from a broader and more comprehensive Standpoint
and has appreciated more fully than ever the public responsibility
that he assumes when he undertakes the management of a bank.
The
public has been awakened to a realization of the vitally important
part that banking plays in the commercial life of the nation.
In recent years there has been a tendency to look upon
banks as purely private corporations organized for individual prof
it, and under what we have called our banking system the right to
start a bank has been regarded as an inherent right of every citi
zen.
To challenge the right of any set of men to charter a bank
if they can provide or procure the necessary capital would prob
ably be regarded as unreasonable
as to challenge the right of the
same individuals to charter a corporation to manufacture shoes.
When we turn back the pages of history, however, we find
that in their inception the incorporation of banking institutions
c ‘^
'-I TbAfl
622
-2was looked upon with fear and suspicion.
The States were reluctant
to grant charters and those that were granted contained exacting
restrictions.
The right of the Federal Government to incorporate
a bank was the subject of litigation and bitter controversy for a
number of years.
The great State of Texas, as you will no doubt recall,
came into the Union with a provision in its Constitution -"That no corporate body shall hereafter be cre
ated, renewed, or extended with banking or discount
ing privileges
*
*
*
The legislature shall
prohibit by law individuals from issuing bills, checks,
promissory notes, or other paper to circulate as money."
As you know, it was not until 1903 that the legislature of
Texas provided for the submission to popular vote of an amendment
to the Constitution authorizing the incorporation of banks.
This
amendment was adopted in November, 1904, and in 1905 a general
banking law was enacted Under which banks might be incorporated.
It seems that as late as 1852 there were no banks in Florida,
Texas, Arkansas, Illinois, Wisconsin, Iowa, Minnesota, Oregon,
California, and the District of Columbia.
One conception of banking advocated in the early days ap
pears to have been that it should be conducted solely for the bene
fit of the public;
that the profits from this business, like the
revenue derived from taxation or from the collection of duties on
imports, should be paid into the public treasury for the benefit
of the people.
In the History of Banking in the United States by the late
professor Sumner of Yale, he says, in speaking of the early banking
i n s t it u t i o n s
"We observe that a bank was conceived of primarily
as a means of creating wealth. Every one wanted to share
in its beneficent operation. If the legislature created
it, all the people ought to participate in its blessings."
Later in discussing the debates
in Congress on the sub
ject of renewal of the charter of the first Bank of the United
States which expired in 1811, he says that "Nicholas of Virginia moved that 'provision' be
made by law for a general national establishment of banks
throughout the United States, and that the profits arising
from the same, together with such surpluses of revenue as
may accrue, be appropriated for the general welfare, in
the construction of public roads and canals, and the es
tablishment of seminaries for education throughout the
United States 1."
When we contrast the attitude of the public in these early
days with that of the present time, it is obvious that the pendu
lum has swung to the other extreme, and that the private interest
of the stockholder or owner often overshadows the public £oapof*3ibility that is involved in the management of a bank.
While the incorporators may take into consideration the
needs of a community before undertaking to open a new bank, this
is frequently a matter of business judgment from the standpoint of
the prospective owner or stockholder.
The State or Federal authori
ties may likewise make an investigation of the local banking facili
ties before granting a charter to a new bank, but here again the
question to be determined is primarily whether the community can
support another bank.
When the charter has been obtained and a bank
is opened for business other considerations than that of the service
.a
r\n>c%
622.
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to be rendered to the public are at times regarded as of first im
portance*
0ompetition with other banking associations naturally be
comes an important factor*
While this competition is no doubt de
sirable in so far as it encourages the officers and directors to
build up and strengthen a bank,, it becomes a dangerous element when
these officers and directors lose sight of their public responsibility
and view the success or failure of the bank solely from the stand
point of the amount of dividends that may be earned, or when they
fall into the popular fallacy of judging the strength of a bank solely
from its aice as indicated by its balance sheet.
It is, of course,
true that a bankTs earnings and the volume of its resources are both
important elements in determining its success, Whether we view the
subject from the standpoint of the public or from that of the share
holder.
It is, however, the source of its earnings in which
the
public is interested and the causes <£ the increase of its deposits.
A bank may increase its earnings by speculative investments or by
charging excessive rates of interest on doubtful risks.
It may
purchase deposits by paying a greater rate of interest than its busi
ness justifies.
It may exceed its corporate powers but by the
transaction may net a profit.
In any of these cases its statement
of condition may indicate success if we are to judge by the appar
ent results obtained.
It is obvious, however, that a bank with
good luck may increase both its earnings and its resources but may
be operated without consideration of its public responsibility.
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622
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It is true that such instances are rare and yet we hot infrequently hear bankers say that the administrative officers of
the Government should limit their inquiries to the financial condi
tion of the bank,, and if it is solvent and its Capital is unim
paired, it constitutes an illegal assumption of authority for an
administrative officer to inquire into those operations which brought
about improvement in its financial condition.
When we analyze the
business of banking, however, is it not true that the public has a
very vital interest in each and every operation?
And is not the
assumption that banks are purely private corporations organized for
the individual profit of the shareholder just as extreme a view
as the early conception that the profits arising from this business
should be paid into the public treasury?
And is it not true that
all administrative officers must.take into consideration the public
responsibility of banks and bankers when they are called upon to
make rulings as to the operations of the banks?
I, of course, do not mean to suggest that bankers, as a
general rule, look upon their institutions as organized solely
for the profit of the shareholders.
On the contrary, there is
an increasing tendency on the part of the officers and direct
ors of banks to consider general and not merely local condi
tions in the conduct of the banking business.
Bankers are brought
into such close and intimate contact with all commercial and in
dustrial activities they are naturally alive to the interest of their
communities.
They must constantly study general conditions in
'_
622
-6order to anticipate the needs of the public.
There are perhaps no
set of men who have occasion to consider and do consider the public
welfare as extensively as the officers and directors of our bank-4
ing institutions.
The public.* however, has an interest in each in
dividual operation of a bank as well as in the net result of these
operations, and it is this fact that is sometimes lost sight of.
The comparatively few adverse criticisms of the Federal
Reserve Act appear to be based primarily upon objections which in
dicate that those indulging in criticism have considered the private
and not the public character of the tanking business.
For example,
among the important provisions of the Act are those which relate
to the collection an<f clearance of checks, and which authorize Fed
eral reserve banks and the Federal Reserve Board to perform the func
tions of clearing houses.
There is perhaps no Operation of the bank
ing business which better illustrates the public responsibilities
assumed than that which the banker undertakes when he performs the
service of collecting checks and other items payable elsewhere than
at the counters of the bank.
Viewing the matter from the standpoint of public service it
would seem that if the efficiency of this service can be increased by
the adoption of a more direct and scientific method of handling these
items, such a method should be welcomed, by the banker;
and yet it
appears that one of the principle objections urged against the. sys
tem provided by the Federal Reserve Act is that the bankers are
afraid the operations‘of this system will curtail their earnings
from collection and exchange charges.
Assuming this to be true,
K.0
1"
is not the objection based upon the assumption that the shareholders
are entitled to receive these charges for the service performed,
whether or not this service can be rendered by more direct methods
on a basis which would benefit the public ?
Is it not true that
this objection is based upon the fact, that a clear conflict results
between the interest of the shareholder and the interest of the
general public.
It is not my purpose
to undertake to discuss in detail the
intricate operations that are involved in our present system of
check collections and clearances, but as bearing upon the question
of the bank's responsibility in these matters and of its duty to the
public there are certain elementary principles involved, a discussion
of which may serve to illustrate the necessity for the perfection of
a more scientific system.
Various experts are at work on plans de
signed to precipitate what they call the "float"; that is to say,
to reduce the number and volume of items that are constantly in
transit.
These experts may not be agreed as to the details of op
eration which will best accomplish this purpose, but they apparently
are agreed as to the necessity for improving this service by the
adoption of more scientific methods.
They are also more or less
agreed that any system must have the cooperation of the banker in
order to reach its greatest efficiency, and from the layman's stand
point it seems obvious that defects which are known to exist should
be corrected, and that the correction of such defects should be
brought about by the cooperation of the bankera rather than by
corrective legislation.
O/ni
JUAif.)
$22
-8In discussing the principles involved, my excuse for refer
ring to certain elementary factors before an audience of this kind
is that all banking operations are so closely inter-related it is
difficult to discuss any:one operation without considering the funda
mental though well-known principles that are involved in that particular
operation.
Under the Act of March lU, 1900, which amended Section 5211 Re
vised Statutes of the United States the gold dollar is established as the
standard unit of value and all forms of money issued or coined by the
United States must be maintained at a parity of value with this standard.
The silver dollar, fractional and minor coins are made legal tender by
statute within certain limitations and certain notes of the United
States are likewise made legal tender.
The volume of this form of
%
. currency or money, however, is, of course, inadequate to carry on
the enormous commercial business of the United States, and bank cred
it as a medium of exchange takes the place of money in a very large
proportion of our commercial business,
As the test writers express it "A bank has been aptly defined as a manufactory
of credit and a machine for facilitating exchanges. It
manufactures credit by accepting the business prospects
of its customers as security in exchange for its own bank
credit in the form of a deposit account. Business credit
cannot be conveniently used for current business transac
tions, but bank credit in the form of checks and drafts
is widely acceptable and is the actual medium of exchange
for a large part of the community."
While a great many obligations are discharged by the use of
checks and by an exchange of credits this is due to the fact that
the public voluntarily and not by reason of any legal requirement
f, fs*y*y
622
-9accepts these checks, and through an exchange of credits many
obligations are canceled without the actual use of money.
The
public is willing to utilize bank credit in this way, because it
furnishes a convenient method of handling commercial transactions
and because it has confidence in the ability of the banks to pay
these checks in legal tender whenever they are called upon to do
so.
It would seem to follow that any system of check, clear
ances and check collections which strengthens the ability of the banks
to respond to a larger percentage of demands for legal tender re
sults in a benefit to the bank by adding to the practical value of
this medium of exchange.
Under our present system the 25^000 or more banks in the
United States act more or less independently;
each bank selects
its own correspondents and makes its collections primarily through
these correspondents.
For example a customer in Dallas presents
a check for $1,000 drawn on a San Francisco bank.
The Dallas bank,
not having a correspondent in San Francisco, indorses and forwards
this check to its correspondent in New York.
The New York bank
credits Dallas and forwa.rds the check to Chicago.
The Chicago
bank, in turn, forwards it to Denver and the Denver bank to San
Francisco.
Until this check is actually paid in San Francisco
the Dallas bank remains liable upon it as indorser.
It is true that
it has obtained a credit in New York, but if the check is returned
this credit will be canceled.
In the meantime, it has paid out
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622
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funds representing the face value of the check to the payee, and if
it is returned unpaid, the hank must look to the payee or drawer
for indemnity.
When we multiply this transaction by the number of items
received by the 25,000 or more banks in the United States, and when
we consider that each bank receiving an item for collection is likely
to select one of its correspondents through which to sentl it, it is
manifest that bank collections are not made through defined chan
nels and that the time consumed in making a collection varies accord
ing to the route by which the several items happen to be sent.
As
a consequence, a very large number of items representing a very
large volume of money are constantly in transit.
In the meantime
the bank which receives these items on deposit and forwards them for
collection is under obligation to pay the amount they represent in
legal tender if it is called upon to do so.
If, by a more scientif
ic handling of these collections, the amount in transit can be re
duced and the time consumed in collection can be cut down, the banks
to this extent are given a greater ability to respond to the demands
that are made and this increased ability is a matter of interest to
the public.
While the check performs a vitally important function in
our commercial development and while it is estimated by some au
thorities that approximately 90 $ of our commercial transactions
are carried on by its use, we must not overlook the fact, that this
use is made possible by the voluntary act of the public and not by
statute.
622
-11-
I do not mean to question the soundness of the practice.
The experience of nearly all nations has demonstrated the fact that
real commercial development is made possible only through the scien
tific use and exchange Of credits.
Some economists go so far as
to claim that if a proper system of credit exchange can be worked
out there is no need for a metallic currency.
Whether this view
is extreme or not every factor which contributes to the ability of
the bank which is used as a medium of exchange,, to respond imme
diately to demands made upon it, strengthens the system and makes
more valuable the credit used.
Bank clearances may be said to constitute the most direct
method of exchange of credits as between banks*
It is through this
method that reciprocal balances are offset or canceled.
Heretofore
clearing house operations have been confined to the larger cities.
If the banks in one city find that time can be saved by meeting
at one place and exchanging reciprocal items rather than by having
each bank send out by runner the checks drawn against every other
bank in that city, is it not reasonable to assume that the same re
sult may be obtained as between banks in the same general locality?
And is not the plan provided for in the Federal Reserve Act merely
the application of a plan which has been tried and used successfully
in the larger cities?
There can be no doubt of the fact that, as
we increase the number of banks that clear through any clearing house,
we will decrease the number of items that are in transit and will
reduce the time consumed in making the exchange of credits.
622
-1 2 -
When Congressman Glass, chairman of the Banking and Currency
Committee, made his report to the House, he voiced the hopes of
the framers of the Federal Reserve Act when he said, in speaking of
hank clearances and collections "The provision as it stands will result in an
immense saving to the trades people of the United States.
It will eliminate the amazing wastefulness incident to
the many independent collection organizations hy substi
tuting one compact collection system."
It cannot he denied that the Act provides for a more scien
tific handling of this important function of the banking business.
By cleaning the various items received for collection through the
agency of the twelve Federal reserve banks, the element of time
will be materially reduced.
For example, an item on San Francisco
will not have to go through four or five intermediary banks, but
may go direct from the Federal Reserve Bank of Dallas to the Fed
eral Reserve Bank of San Francisco, and through an adjustment of
accounts in Washington the transaction will be completed in a very
much shorter time than is possible through the many independent col
lection organizations now in use.
The advantages of one compact system are obvious.
The
objections that are raised are founded primarily on local inter
ests.
A bank may prefer to send an item for collection to its
reserve correspondent, since it shows immediately a credit with its
correspondent, and not only counts this as part of the reserve which
it is required by law to maintain but in many instances receives
interest on this deposit,
In counting as reserve an item which
fVl s
Jw'J 312 .
k
622
-13is drawn against some other hank than its reserve agent, it is
treating a conditional credit as funds actually deposited with
its reserve agent*
In other words, let us suppose that a Dallas bank sends
a check on San Francisco to its New York correspondent, which is
its reserve agent and receives credit on the books of its reserve
agent.
If the check is returned unpaid, it is charged back to the
account of the Dallas bank, and until actually collected the Dallas
bank remains liable on this check.
It does not show this liability
on its books, but takes credit for the amount of the check.
is one of the legal inconsistencies of this practice.
This
When the Dal
las bank receives this check and gives credit to the depositor it
has a claim only against the drawer and indorsers of this check.
The San Francisco bank, not having certified the check, ha 3 assumed
no liability.
If, instead of receiving a check from its depositor, it
accepted his promissory note and indorsed and rediscounted this
note with its reserve agent, while it might show the credit thus
established as part of its reserve, it would show on the other side,
of its ledger a liability to its reserve agent for money borrowed
in addition to the liability shown on the individual ledger to the
depositor.
The practice, therefore, of building up reserves by condi
tional credits presents an anomalous situation, and if banks should
be required to discontinue this practice and should not be permitted
to count collection items as reserve, until they have been actual
ly collected, they would manifestly take into consideration
the
-f! f\
622
-lU-
element of time and would undertake to reduce this to a minimum
by the adoption of any scientific method of clearancest
It is, of course, realized that a change of this sort
must be brought about gradually and the Federal Reserve Act pro*
vides a medium by which this can be done without disturbance to
existing conditions.
It would seem to be to the interest of the
banks to adjust their operations so as to accomplish this purpose.
In the same manner it is to their interest to bring about
by thorough cooperation the perfection in every detail of a scien
tific system of banking.
This is of especial importance at this time in view of
the general disturbance of international trade conditions that re
sults from the great European war.
No bank could be expected to liquidate its own assets in
time to discharge any large proportion of its obligations in case
of unusual demands if it had to rely solely upon its own debtors.
The very nature of the banking business makes this impossible.
The
larger proportion of its loans and investments are made for fixed
periods of time, while the larger proportion of its obligations are
payable on demand.
When these demands are in excess of normal and
when the bank is under the necessity of converting its loans or in
vestments into cash in order to meet these demands, it must rely
primarily on other banking institutions.
When unusual demands are made upon a great number of banks,
it necessarily becomes more difficult for the banks to convert their
O,
i
622
-15investments into cash.
The panic of 1907 is still sufficiently fresh in the mem
ory of the hanker for this situation to he fully understood and ap
preciated.
the experience of that year demonstrated the fact that
when the strain becomes general liquidation of assets becomes cor
respondingly difficult.
You will recall that at that time the hanks
were forced to resort to various expedients in order to meet the
demands made upon them.
United States bonds were borrowed in order
to increase circulation.
In .many localities banks found it neces
sary to refuse to pay out money except in small amounts.
house certificates were used as a temporary substitute.
Clearing
Banks which
had money on deposit with their reserve agents found it difficult to
obtain this money for their needs since their reserve agents were
likewise in need of additional funds.
Banks in reserve cities which
had been competing for country bank accounts began to question the
advisability of soliciting and paying interest on those deposits.
The Federal Reserve Act provides a scientific remedy for
the difficulties that were experienced during that year.
One of
its purposes is to make the reserve carried with a Federal reserve
bank actual reserve which will be available when needed and not
merely reserve in name.
By a concentration of a part of the cash
resources in the twelve Federal reserve banks funds are made availdie for use wherever they are needed.
If the demands of one sec
tion are greater than the demands of another, the Federal reserve
bank may obtain rediscounts with other Federal reserve banks, and
J'Jj
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622
may thus acquire the benefit of the surplus funds in other districts*
In addition to making the money in circulation available whenever it
is^need^d provision is made for an increase of circulation by the
issuance of the Federal reserve note*
The machinery has,, therefore, been provided for a compact
and scientific system of banking which gives additional strength to
every member bank.
The critics of the system do not deny that it
is scientific and sound, but complain that it is composed of only
or
7,500 out of 25,000/more banks; that it does not represent the full
force of our banking power.
The advantages of the System, however,
are fortunately open to the State banks and trust companies as well
as to national banks, and it is possible for the State institutions
to share in its benefits.
Bankers and economists are not agreed as to the effect that
the European war is destined to have on the commercial business of
this country.
There are those who feel that during the readjustment
of commercial interests following the close of the war this country
must look for a reaction and can not expect an indefinite continuance
of the present prosperous conditions; that the markets of the bellig
erent nations will be reopened, and that competition for the world’s
trade will make it difficult for this country to market to advantage
its great resources; that securities held by citizens of other coun
tries will be sold and will have to be absorbed by our markets; that
following a period of commercial prosperity it will be difficult for
those who have shared in and enjoyed this prosperity to readjust them-
622
-17-
selves to new conditions; that plants and factories which are now
making munitions of war and which are supplying the "belligerent na
tions with necessities will have their output reduced and will have
to find other field for their activities.
There are others who are inclined to the view that there
will be no substantial reaction until sometime after the close of
the war; that competitive markets will have to be reorganized; and
that during the period of readjustment of the commercial affairs of
those unfortunate nations which are now engaged in this great con
flict, there will continue to be a great demand for our products;
that many of our factories and institutions which are furnishing
supplies to the belligerent nations are already operating on profits
earned and are accumulating a surplus which will enable them to con
vert these factories to other uses.
The economists, however, are agreed that sooner or later
we must face conmercial conditions which are unprecedented in the
history of the world; that, as one of the great commercial nations
of the world, we must bear our proportionate part of whatever strain
there may be.
It can hardly be denied that,any situation that may
arise can best be met by a compact, effective banking system better
than by on unorganized system of unrelated banks.
The enormous
banking power of the nation should be used to advantage.
I do not mean to question the strength of our banking
institutions.
It is manifest that our banks are stronger today than
at any time in the history of the nation, and that we have the re
sources and the potential power to insure continued prosperity is
~p 3 r*
J.lutlJl
no doubt true, but the responsibility is very largely with the
bankers to determine the degree of that prosperity.
By coopera
tion and proper organization and by a scientific use of these re
sources a greater degree of prosperity will follow than will be
possible if the individual interest of the banker is to over
shadow his public responsibility.
Those who believe in preparedness might well apply the
principles involved to our banking situation.
Whatever potential
powers the banks may have acting independently, their efficiency
will be increased by systematic organization.
It is encouraging
to note that the State authorities are acting in harmony;
the State laws are being remodeled along scientific lines;
that
that
the legislatures of most of the States have taken the necessary
action to make it possible to perfect our banking system, and we
have every reason to believe that we will ultimately have a bank
ing. system that will make it possible to utilize the banking re
sources of this country to far greater advantage than is possible
at present.
We have reason to hope and believe that whatever the
outcome of this world struggle this country will be enabled not
merely to insure its own prosperity, but to lend thp assistance
that its size and importance demands in the readjustment of the
world's trade and the rehabilitation of the world's prosperity.
„«
THE BANKER AND THE DAW.
a
Address of MILTON C. ELLIOTT to
be delivered at meeting of Alabama Bankers'
Association - held at Pensacola,, Florida, on
April 29, 1916.
Mr. President and members of the Alabama Bankers5 Association 2
The Federal Reserve System has been in operation for a
period of about eighteen months.
The Act which created this System
has been in force since December 23, 1913. It is natural that legis
lation of this importance should be the subject of both favorable
and adverse criticism.
From these criticisms we::are enabled to determine to some
extent the attitude of the banker as well as that of the public.
From its operation during a period of abnormal prosperity
it is difficult if not impossible to judge of the efficiency of any
banking system.
It is in times of stress rather than in times of
prosperity that the real test must come.
An analysis of the adverse criticisms of the Act, however,
will at least indicate what are supposed to be the defects in this
legislation which must be corrected or which must be proven not to
exisl by experience or by a better understanding of the principles
involved.
On the one hand it is claimed by a very large majority of
those who have followed closely the operation of the System during
its first year that it has inspired confidence;; that it is develop
ing sounder and more scientific banking practices and that in prin
ciple it is the most important constructive legislation that has ever
been enacted by Congress,
-5^
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624 -
1 C?.8
-2'
On the other hand, there are those who say that it is a
banker*s law passed in the interest of the banker; that it may in
crease the lending power and the earning capacity of the banks,
but that it does not make it easier for the borrower to obtain loans;
that interest rates are still as high as ever, and that the fanner,
the merchant, and the general public have not been benefited.
There are officers of member banks who claim that the Act
imposes unnecessary restrictions and hardships on the banking busi
ness; that the transfer of reserve balances to the Federal reserve
banks deprives them of earnings they have heretofore enjoyed; and
that, while their lending power may be increased, other features of
the Act offset atty advantage that might be derived from this source*
There are officers of non-member banks who are inherently
opposed to the System On general principles and others who are pur
suing a policy of watchful waiting and who desire a practical demon
stration in dollars and cents of the advantages to be derived from
membership before becoming stockholders in any Federal reserve bank.
who
There are still others/( while admitting that confidence
has been inspired and possible panics have been avoided) claim that
the same results might have been attained by other less complicated
methods.
One of the prominent New York publications recently contain6 (J-;an article claiming that the Aldrich-Vreeland Act providing
for emergency currency would have accomplished all of the benefits
that have been accomplished by the Federal Reserve Act.
The Wall Street Journal in a recent issue published an
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article in which the following statement appears:
"The head of one of tho largest hanks in the country
privately declared when the Federal Reserve Act was going through:
•We are hot much concerned^ we are gradually
clipping cur bondsj the state laws are being retobdeled upon safe, conservative! lines, and my own
impression is that it is only a question of time
when the national banking system is a thing of
the past and the Federal Reserve System will be
on the hands of the Government and not on the hands
of the banks* We can get along without any national
banking system in the United States if we only have
strong central reserve banks under state laws. 1 "
I do not mean to suggest that bankers generally have made
objections of this sort or that these criticisms represent the views
of the majority.
On the contrary the Federal Reserve Board and the
officers of the several Federal reserve banks have had the coopera
tion and assistance of the bankers in placing tho System in opera
tion, and one of the most significant indications that the princi
ples of the Act are both sound and scientific is the absence of any
general complaint on the part of those who are most familiar with
banking from a practical standpoint.
The criticisms 'which have been made may be said to rep
resent four viewpoints:
(l)
That of the borrower who assumes that to increase the bank's
lending power correspondingly decreases the difficulty of obtaining
loans. This is, of course, true in the sense that an increase of
lending power makes available additional funds for conservative in
vestment. It was not intended,however, to make it easier to borrow
■% rv~,r
JLO «-*"*-
Gzk
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money without the same security or financial responsibility that
was required before the Act.
The bank is naturally as anxious to
lend as the borrower is to obtain loans where the security or finan
cial responsibility offered is adequate;
Interest rates,, as a matter
of fact, have been appreciably lowered in most sections during the
past year.
Whether this is due to the operations of the Federal
reserve system or in part at least to an unusual period of prosperity,
this criticism does not appear* to have been justified.
In any event
a charge of this kind can not be properly considered without the facts
upon which it is based.
(2)
Another viewpoint to be considered is that of the officer
of a member bank who feels that his bank is placed at a disadvantage
in competition with non-member banks because of the requirements
of the Act.
To consider this and other like objections it is ne
cessary to analyze some of the purposes and to consider some of the
effects of the Act.
(3)
The third viewpoint may be said to be that of those who
are inherently opposed to any Federal banking lasra and who feel that
the States should have exclusive jurisdiction over and control of the
banking business.
This opposition has been mainfested from time to
time ever since the adoption of the Federal constitution.
A brief
review of State and Federal legislation will best illustrate the
difficulties involved in establishing a compact banking system where
the banks composing, the system conduct their operation vender the
laws of forty-eight States.
These difficulties are manifest since
a S ta te has j u r i s d i c t i o n over t r a n s a c t io n s c a r r ie d on w it h in ‘i t s
"borders, while each bank is required as an incident of its business
to engage in transactions outside of the borders of the State in
which it is domiciled.
(H)
The fourth Viewpoint may be said to be that of the banker
who recognizes the fact that the business of the country can be
conducted to a greater advantage under a scientific banking system
than it can be by several thousand unrelated banks, but who desires
to be assured by a practical demonstration that the Federal Reserve
System is scientific and will accomplish its desired purposes be
fore he becomes a member of the System.
Before undertaking to discuss the merits or demerits of the
Federal Reserve Act, it seems appropriate to consider the attitude
of the banker towards banking legislation generally.
In addition to the Federal Reserve Act which was enacted by
Congress, the various State legislatures in recent years have pro
bably enacted more general banking laws than at any time during the
previous history of this country.
The trend of nearly all of this
legislation has been to more clearly define and to provide for the
regulation and supervision of the banking business.
Has this legislation been enacted at the instance of the
banker in order to safeguard and promote the banking business or
has it been passed as a result of a popular demand for greater
protection to depositors and customers of the banks?
When we consider the fact, that there has been no popular
outcry against abuses of banking powers; that there has been no
concerted effort on the part of the public to correct supposed
banking evils, io it not a significant fact, that the trend of
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State as well as Federal legislation has been to provide for a more
effective supervision and regulation of the banking business?
May
we not infer from this fact that the banker feels that his interest
as well as that of the public will be best served by the enforcement
of laws which will require all banks to conduct their operations
along conservative lines?
It is unquestionably true that the officers of a bank rarely
complain because of a too rigid examination of the affairs of the
bank, but are much more apt to criticise a cursory and incomplete
examination by a bank examiner.
It was my experience as an ex
aminer that the officers of banks were uniformly anxious to learn
whether by inadvertence any provision of law had been violated, and
to adjust their affairs ao as to conform to all requirements of the
National Bank Act.
The success with which the great banking business of this
country has been conducted under an admittedly defective system
is a sufficient proof of the conservatism and integrity of the
banker.
It is probably because he is lawabiding that he wants to
digest any new or proposed legislation and to fully understand its
purposes and probable effects.
This being true, is it not reason
able to infer that recent legislation providing for a more careful
supervision and regulation of the banking business is attributable
to the fact that such legislation strengthens the banks and promotes
the development of the banking business along legitimate lines?
Conceding this, it is necessary to consider what necessity exists
J
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624
-7for legislation of the character which has been enacted by the
States as well as by the Federal Government in recent years.
This
necessity can be best understood by reviewing briefly the history of
legislation on the subject of banking in the United States.
For many years banks were chartered by special acts of the
legislature.
It was not until .1838 that the free banking system
was adopted by some of the States.
of the earlier State
In defining the corporate powers
banks, various restrictions were imposed upon
their operations.
These restrictions related primarily to the amount
I
of indebtedness that might be contracted and to the character of in
vestments to be made.
Some of these restrictions were the outgrowth
of the prejudice that existed against banking during the early period
of our national history and furnish an interesting illustration of
the extreme to which the legislature may go.
The historians tell us that after the revolution the banking
business was looked upon with fear and suspicion.
a bank
The granting of
charter was almost invariably made a political issue which
engendered
the most bitter controversies.
The first incorporated
bank in the United States was chartered by the Continental Congress
in 1781, and the validity of its charter was immediately brought in
to question.
It was contended that the Federal Government was without
any power to incorporate a bank, and in view of the doubt created a
charter was obtained from the State of Pennsylvania in 1782.
This
bank which was known as the: Bank of North America continued as a
State bank until 1864 when it entered the national system.
K
f>
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In 1791 the Bank cf the United States
was incorporated by
Congress. The right of Congress to create this bank was questioned
and its establishment was bitterly opposed.
a chdrter for a period of twenty years.
It was finally granted
Upon its expiration Congress
after a bitter fight refused to renew its charter.
In spite of repeated efforts on the part of those who were
in favor of the establishment of another
Bank of the United States
it was not until 1816 that a charter was secured for the Second
Bank of tho United States , ' This, bank which obtained a State charter
before its federal charter expired was finally forced out of exist
ence by political influencesi
During this period it was almost
equally difficult to obtain a State charter and those charters which
wore granted contained many of the same restrictions that are now
embodied in the National Bank Act and in the laws of the several
States.
In the "History of--Banking of All Nations", by the late
professor Sumner of Yale, published by the Journal of Conmerce and the
Commercial Bulletin in 1896, certain striking illustrations of the
attitude of the public to banking are referred to.
It is said that in 1803 two bank acts in Vermont wore
vetoed on the ground " that banks demoralize the people by gambling and
concentrate the wealth in the hands of the few and arc useless to the
many since they give credit only to the rich. ”
In speaking of the Bank of Alexandria,Virginia, it is said
that,"It required all the eloquence of Brandt of Virginia to per
suade the legislature that the little Bank of Alexandria would not
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9
624
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sweep away their liberties."
It is said that in Massachusetts in 1799; "a law was passed
making it unlawful to join any association to do hanking of any kind
unless authorized by law, the penalty being $1,000.”
As illustrating some of the restrictions imposed upon the
banking business it is of interest that in 1874, the legislature
of Rhode Island passed a law, "finitg any officer of a bank $50 for
every check, note, or bill signed by him for less than $50 payable
at any place out of the State.
A fine of $5 was also imposed on
any person who should pass a note for less than $5 issued by a
bank out of the State ♦11
Among the early regulations which were adopted either in
>
the constitution of the banks or in the Acts of incorporation it is
said that in the case of the Bank of Massachusetts, chartered Feb
ruary 7; 1784, "amongst the rules of this bank were the full names
of all delinquents to be posted in the bank in order to avoid use
less applications for credit; absolutely no renewals."
In a New York bank incorporated about the same time the
constitution of which was supposed to have been written by Alexan
der Hamilton, the following rule was said to have been adopted: "No
discount will be made for longer than thirty days, nor will any note
or bill be discounted to pay a former one.
Payments must be made
in bank notes or specie."
Another interesting rule referred to which is in striking
contrast with the publicity required in our banking business at
■f .O-fr er
621+ 1056
10
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this time was that of a hank in Hartford, which was that, "what
passes in the hank not to he spoke on at any other place."
In addition to these somewhat ex-theme and unusual fegulations many of the early charters contained JsrohihitiOns agaiftst making
loans or dealing in real estate, they limited the amount of mofley
that might he borrowed by a hank and stipulated certain investments
which could not he made.
Nearly all required the maintenance of
a proper reserve against deposits and against circulation.
A distinction was made between liabilities for deposits and
liabilities incurred in other ways.
It is claimed that this was
due to the fact that deposits were created at that time hy the de
livery of actual funds to the hank and were not multiplied as they
are today hy the use of promissory notes, drafts, and hills of ex
change.
This distinction, however, has been continuously observed
in the act regulating the banking business and is still recognized.
It was probably because of the political favoritism shown in
granting bank charters and of the bitterness that developed whenever
an attempt was made to procure such a charter that the free banking
system was adopted hy many of the States.
Under this system hanks
were chartered under general hanking laws adopted hy the States.
As
a development of this practice banks were chartered in many States
which had adopted no hanking laws, under the general laws applica
ble to corporations.
The charters granted under general laws lacked
uniformity, were very broad in their scope, and in most instances
were free from restrictions.
It is only in comparatively recent
years that the majority of the States have adopted laws regulating
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62U
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the business engaged in by the banks, and it was not until I863
that the Federal Government attempted to create a banking system by
the passage of what is known as the National Bank Act.
'When we
consider the restrictions placed on the operations of the earlier
banks and compare these with the regulations now in force it is
apparent that the tendency during the last fifty years has been to
liberalize the banking business, and that only those restrictions
which have been considered necessary to safeguard the interests of
the depositor and customer of the bank have been retained.
This
is illustrated by the fact that in the fifty odd amendments to the
National Bank Act nearly all have been along lines which increase
the lending power of national banks.
For example, these banks were originally prohibited from
lending an amount greater than ten percent of their capital stock
to any one person, firm or corporation.
By.-an amendment to the
Act national banks are now. authorized to lend to any one person,
firm, or corporation an amount equal to ten per cent of their cap
ital and surplus, provided this does not exceed 30 $ of their cap
ital.
They were originally authorized to issue national bank
notes to the extent of 90$ of the bonds deposited as collateral
security.
This amount has -been increased to one hundred per cent
of the bonds so deposited.
They were originally;required to maintain reserve against
circulation as well as against deposits.
All reserve against circu
lation except the 5$ redemption fund was abolished by amendment, and
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while the Aldrich-Vreeland Act was in force national hanks were not
required to maintain any reserve against Government deposits.
Liberality was also shown in the administration of the
national hanking laws.
For example, in computing the liabilities
against which reserves should he maintained hanks were permitted to
deduct balances due from hanks from the balances due to hanks, and
to carry reserve only against the net balance due to banks.
practice has been confirmed by the Federal Reserve Act.
This
In spite of
efforts to liberalize and bfoaden national banking powers, both by
legislation and by the administration of the laws, it was generally
conceded that national banks were more restricted in their opera
tions than their competitors, the State banks and trust companies.
Accordingly, to place them more nearly on an equality with State
banks and trust companies, the Federal Reserve Act provided for a
further increase in the powers of national banks.
By this Act the
reserve to be maintained against demand liabilities has been reduced.
National banks which were heretofore prohibited from lending on
real estate have been authorized to lend a limited amount of their
resources on farm lands.
While they were limited in the amount of
money that they might borrow from other banks they have been given
the power to rediscount with Federal reserve banks their commercial
paper, and have in addition been authorized to increase their lia
bilities by accepting bills of exchange or drafts which are based
on the exportation or importation of goods; and with a view of co
ordinating their powers with those of trust companies many of which
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do a commercial tanking "business they have "been authorized to ex
ercise, with the approval of the Federal Reserve Board,, the powers
of trustee, executor, administrator, and registrar of stocks and
"bonds, when the exercise of these powers dees not contravene the
laws of the State in which they are located.
It will be observed,, therefore, that the banking powers
of both State and national banks hare been consistently enlarged
and liberalized.
It necessarily follows that as these powers are
increased, the necessity for proper supervision and regulation is
correspondingly increased, and it is in this view that the recent
legislation providing for more careful supervision and regulation
becomes significant.
The danger that follows the failure to regu
late the banking business is clearly illustrated by a considera
tion of the circumstances, under which State bank notes were with
drawn from circulation.
It will be recalled that in their inception both State
and national "banks performed the functions ox banks of issue as well
as banks of deposit and discount.
Before the Civil War State bank
notes constituted one of the principal mediums of exchange, and their
circulation and the power to issue these notes was looked upon as
one of the most important functions of banking.
Under existing
laws, while State banks still have the legal right to issue bank
notes, only national banks and the recently created Federal reserve
banks exercise this right,
culation.
State bank notes are no longer in cir
The fact that Congress.imposed a prohibitive tax on State
c *
arv£if\
62 k
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"bank circulation was due in part at least to the lack of uniformity
in State hanking laws, and to the lack of supervision and regulation
of the business of State hanks.
It may he said to be an elementary principle of economics
that any substitute for specie currency must have a stable value
if it is to be used successfully as a medium of exchange.
If a chedit
instrument is to be used to discharge other obligations itsvalue must
be unquestioned.
Accordingly, if a bank note is to be accepted in
the discharge of an individual liability, the individual accepting
the bank note must be assured that at his option it can be con
verted into specie at its fact) value.
Some of the States realize this and imposed the necessary
restrictions on the issue of such notes.
Banks were required to
maintain a proper reserve of cash against them to make provision
for their prompt redemption and the amount of issue was limited by
the laws of the State.
Others imposed few if any safeguards.
Lit
tle or no provision was made for their redemption and the value of
the note as a medium of exchange depended upon the reputation of the
issuing bank.
The inevitable result was that the notes of some banks
were accepted at par through a wide section of the country.
The
notes of others were accepted at par in the immediate neighborhood
of the issuing bank, but were discounted when offered in settlement
of liabilities in other parts of the country.
The notes of still
other State banks had little or no value as a medium of exchange.
As the States had failed to standardize their banking laws it be
lesi
came necessary fcsr the Federal Government to pass an Act designed;
among other things, to provide for a more uniform currency, and to
accomplish in this way what the States had failed to accomplish by
not providing for proper supervision and regulation of the banking
business.
As originally passed the Act of 1863 authorized State as
well as national banks to issue their notes on the security of Govern
ment bonds. In 1864, however, this provision was omitted when the
original Act was amended and re-enacted , and in 1865 a tax of ten
per cent was placed on State bank notes which were placed in circu
lation.
While Congress would no doubt have created the national
banking system in any event, since the Federal Government needed
these agencies in the conduct of its fiscal affairs, it ia at least
probable that, except for the failure of the States to properly super
vise and regulate the banking business, no necessity would have arisen
for the tax which was imposed upon State bank circulation; and the
fact that this necessity did arise demonstrates the value to the
banking interests of supervision and regulation.
Since 1865 this form of bank credit has not been used by
State banks but bank credit in the form of checks, drafts and bills
of exchange is still used for many of the same purposes and consti
tutes a medium of exchange in commercial transactions in this country.
Mr. Brown, instructor in political economy in Yale Univer
sity. in his work on International Trade and Exchange, says that
it is estimated that more than nine-tenths of the total business
624
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of the United States is carried on through the use of hank credit.
This being true it is manifest that the same necessity for regula
tion of the banking business exists today that existed in 13t>4, and
this necessity has been materially increased since the banking bus
iness has reached such enormous proportions and the powers of banks
have been so consistently liberalized.
When we examine, however, the adverse criticism of the
Federal Reserve Act, and analyze the indictments made against it,
many of them seem to be based upon an objection to those provisions
which are designed to scientifically regulate the banking business.
For example, the officer of a member bank who objects to
the Act because he is required to maintain a proper reserve against
demand liabilities, and who objects to losing interest on reserve
balances usually carried with other national banks,fails to take
into consideration that this regulation is in the final analysis a
benefit rather than a burden, since it tends to strengthen the
credit of the banks composing the System.
He fails to appreciate
the fact that the purpose of this provision is to provide for an
actual reserve to take place of a reserve in form only; and to make
this reserve available at all times.
He overlooks the fact that ex
perience has demonstrated that under the old system it was difficult
in times of panic for a national bank to get the benefit of reserve
balances carried with approved reserve agents.
In estimating his
loss from this source he fails to take into consideration that his
lending power has been increased: (l) by a decrease in the amount of
JjLVJ^
- 17 reserve to be maintained; (2) by his ability to rediscount his commer
cial paper with the Federal reserve bank; (3 ) by the use of his credit
in the form of acceptances in certain transactions; and that the po
tential earnings that may be derived from this increased lending
power will more than offset any loss that results from interest on
reserve balances.
The opposition of an officer of a non-member bank who is
inherently opposed to Federal supervision is likewise based to a
very great extent upon the assumption that Federal laws are too
exacting and are enforced with too great severity.
If this is not
the basis of his contention it is somewhat difficult to understand
why Federal regulation and supervision is less desirable than that
of the States.
The suggestion that a compact system will be created by
remodeling the laws of the several States has been more or less fre
quently made.
The difficulties in accomplishing this purpose, are,
however, at once manifest.
If we assume that all of the States
could be induced to adopt one standard of banking laws, thus pro
viding for uniform regulation and supervision, this uniformity might
be destroyed at any time by amendments to the State banking laws
of one or more States.
The laws of each State would apply to trans
actions engaged in within the borders of the State, whereas, each
bank, as an incident of its business has transactions with banks and
individuals in other States.
Legislation might be uniform but the
same laws might be administered with great liberality in one and with
<I
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- 18 severity in another State.
It is not possible within the limits
of this discussion to consider the many difficulties involved in
this proposal* hut it must be obvious that from a practical stand
point it would be exceedingly difficult to accomplish.
Conceding that the business of this country can be conducted
to greater advantage under a compact and scientific banking system
than is possible where it is handled by several thousand unrelated
banks, it is manifest that objections made to the creation of such a
system must be based upon local considerations.
Those who claim
that the same objects may be accomplished by less complicated methods
apparently assume that it is only necessary to continue to liberalize
banking powers in order to meet new conditions and that an extension
of banking powers does not necessitate more effective supervision.
When we consider that the Federal Reserve Act deals with the
various activities of banking; that it provides for a more effective
supervision; that it adds to the power of national banks the ability
to lend its credit in the form of acceptances; that it concentrates
reserves so as to make them available when needed; that it provides
a legitimate method for the rediscount of commercial paper; that it
adds to the national banking powers the power to lend on real estate
to a limited extent; that it permits national banks to act in certain
fiduciary capacities; and that it provides a medium by which the sur
plus funds of one community may be utilized to supply a deficit in
another; and when we recall that this important constructive legis-
A
lation was not undertaken until Congress had collected and analyzed
more information on the subject of banking and currency than has
ever been collected by any commission in the history of the world,
it is difficult to understand upon what theory it can be argued that
the Aidrich-Vree1and Act which merely added an additional method
/
by which banks might borrow money to be used in an emergency can
be said to afford the same advantages that are afforded by the
Federal Reserve Act.
It is of particular importance at this time that a scien
tific and compact banking system should bo perfected.
The use of
bank credit is constantly increasing in the conduct of the business
of this country.
In so far as a bankas business is local the repu
tation of those who have charge of its management may be a sufficient
guarantee of its credit, but when a bank engages in transactions
with those who have no personal knowledge of its management, reli
ance must be placed upon its statement of condition rather them upon
the personnel of its board of directors, and the reliability of this
statement must depend to a very great extent upon the character
of the laws under which it operates and the manner in which these
laws are administered. It is not sufficient that this statement
shows an excess of assets over liabilities due to creditors, but the
investment of its funds must have been made under laws which provide
for proper regulation and supervision of its business.
Liberality in banking laws brought about by the single
desire to increase earnings may reach the danger mark.
The laws
'I -Oi/fiLA
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-20regulating the banking business are, therefore, an asset of the
bank. Every banker has an interest, not only in his own credit,
but in the credit of every other bank with which he deals. Few
commercial transactions can be completed.
that do not involve at
some stage the use of credit, and bank credit is generally substi
tuted for that of individuals in completing these transactions.
It is, therefore, of interest to the banker to see that the laws
provide proper safeguards and to cooperate in the enforcement of
these laws. Whore the public undertakes by legislation to restrict
the exercise of business judgment and to substitute a rule of action
prescribed by the law makers, it is necessary that careful considera
tion should be given to the interest of the banker.
On the other
hand, in reaching a conclusion as to the value of legislation, it is
equally important that the banker should give consideration to tho
public interest as well as to the interest of tho individual bank
he represents.
A law that places no restrictions on banking opera
tions makes it possible for a few to endanger the business of the
most conservative, since if public confidence is shaken the whole
banking structure is affected.
The creation of a compact banking system is particularly
important at this time. As a result of the European war this country
is called upon to assist many of the neutral nations in financing
their commercial transactions. This necessarily involves the use in
other countries of tho credit of banks in the United States, and
other nations have an increasing interest in our banking laws.
J4t OOf?*"*
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The National Bank Act has served to accomplish the purpose
its advocates claimed for it. Bank note circulation has been placed
upon a substantital foundation, and as agencies of the Federal Govern
ment national banks have aided materially in the conduct of its fis
cal affairs. Many of the disadvantages of the old independent treas
ury system have been overcome. With the benefit of more than fifty
years experience Congress has been able to determine the defects
as well as the advantages of this legislation and the new Federal
Reserve System is a development of the system established in 1863.
Unlike most of the previous legislation on banking and currency
the Federal Reserve Act was not the outgrowth of a demand for legis
lation to meet a pressing emergency.
Its provisions were adopted
after mature deliberation and after an exhaustive study of the future
as well as the present needs of the country. Those who are familiar
with the intricacies of banking from a practical as well as theo
retical standpoint have declared it to be based upon scientific and
sound principles. The machinery for a strong and compact system
has been provided. This machinery may require some slight adjustments
from time to time which will be brought about by amendments proved
to bo nocessary by experience. It is free from the objections which
occasioned the alarm that was felt when the first and second Banks
.then
of the United States were organized. The public feared that/their
liberties would be endangered by a concentration of power in
one mammoth corporation.
The present system provides for a co-ordination of the
powers of the several thousand banks which compose it, but each bank
is an independent corporation owned by independent stockholders and
managed by directors selected by the stockholders. It furnishes a
legitimate method of cooperation which gives additional strength to
each member bank. It provides for a. standard of, regulation and super
vision of the banking business which is more permanent than would
be possible if the standard established were subject to modification
by amendments passed by the forty-eight different States acting in
dependently.
The rapidity with which this system develops must, of course
depend in the final analysis upon the cooperation of the banker. To
the layman the advantages derived from membership far outweigh any
possible objections which may be based upon the theory that member
ship of State banks in this System involves some curtailment of
banking powers. The restrictions imposed are only such as experience
has demonstrated to be necessary to properly safeguard the interests
of those who deal with banks, and the fact that member banks are sub
ject to these restrictions and to proper regulation will in the end
prove an assetiin the development of its business and not gin obstacle
to that development.
In times of unusual prosperity when the deposits and resour
ces of banks are constantly increasing and there is a surplus rather
than a deficit of loanable funds, it is natural perhaps that the
banker should feel confident that, acting independently, he should
be able to meet any emergency, and that he can obtain such assistance
624
- 23 as may be necessary from other hanks with which he deals.
It is in
such times, however, that our system should he strengthened and that
preparation should he made for any reaction that may occur.
If this
preparation is made in prosperous times it can he accomplished on
more scientific lines than is possible if made only when there is
an existing emergency to he met.
The economists are not agreed as to just what conditions
must he faced following the close of the great European war, hut they
are agreed
that we can not expect an indefinite continuance of the
present prosperous conditions, and that socner or later we must he
prepared to meet conditions which are without precedent.
It is obvious, therefore, that, in analyzing this legisla
tion, the hanker should view the subject from a broad and comprehensive
standpoint and should not let purely local considerations influence
his judgment.
It is equally obvious that any unusual demands that may
he made on the resources of this country following the close of the
European war can he met with less disturbance to our commercial pros
perity by a compact, well organized system than by several thousand
unrelated banks each acting independently.
It is, therefore, to the
interest of the hankers to co-operate in developing a system which
will not only insure a continuance of prosperity in this country, hut
that will make it possible for the enormous hanking resources of the
United States to be utilized to advantage in the readjustment of the
world's trade.
A system that will enable the hanks of the United
States acting as nearly as possible as a unit to .lend all possible
assistance in the rehabilitation of the prosperity of those unfortunate
countries which are now engaged in this great conflict.
4/21/16,
1009
1070
626 .
Washington, D. C> April 22, 1916
OUTLINE OF THE PLAN OF CLEARING AND CHECK
COLLECTION ADOPTED BY THE FEDERAL RESERVE BOARD .
The Plan proceeds upon the following assumptions and principles:
First:
A Federal Reserve Bank can not compel an unwilling member
bank to send the checks of its patrons to it for collection
or clearing,
Second:
It would be inexpedient at the present time even if
legal, upon which no opinion is expressed to compel an un
willing member bank to pay at the counter of the Federal
Reserve Bank, a check drawn against it (i.e., the member
bank) before it has even seen it.
The member bank may,
of course, authorize the Federal Reserve Bank to redeem
at par checks drawn against it and forward them to it for
final settlement; or, it may authorize the Federal Re
serve Bank to charge t^e checks against its account;
Third:
In view of the conditions hereinabove stated, and
because your Committee believes that the best results will
be aecured by a complete co-operation of the member banks
with the Reserve Bank, it is proposed that the plan to be
followed shall be sufficiently attractive to member banks
to appear to them as desirable.
Hence, in carrying out
this
it is proposed to follow the lines of develop- ■
ment which long experience by member banks in their relations
with city correspondents has established.
This, in effect,
means that Federal Reserve Banks shall receive from their
member banks, checks, whether drawn against members or non
members, or private bankers, and give immediate credit for
them;
Fourth:
Your Committee regards it important that the Federal
Reserve Banks shall strictly guard their reserves and that
member banks which do not maintain the reserves required
by law shall be penalized for deficiencies. In this con
nection, the Federal Reserve Bank will not class as reserve
-
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626
any chock?, which-it has received from its members and credited
to them but which have not been collected.
Fifth:
While it is proposed that every Federal Reserve Bank
shik.ll render this service of collection for all those mem
ber banks who choose to avail themselves of it, it is not
contemplated that the service shall be rendered gratis,
or without expense to the depositing bank, which is the
beneficiary.
Therefore, as explained in Mr. Harding’s
memorandum, every Federal Reserve Bank shall keep adequate
analyses of its clearing and collection expense and charge
the depositing bank for the service rendered, the actual
cost of that service, as nearly as it may be determined,
including interest at a rate to be determined upon and
approved by the Federal Reserve Beard, upon all cash
advances. On the face of it, this means that a member
bank might deposit checks on far distant banks and secure
immediate credit at par for these items, and at the same
time draw against them before the Federal Reserve Bank
has been able to collect.the funds, but, as a practical
matter, a member bank could not afford to do this for the
reason that it is proposed to charge the member bank, as
a part of the expense of handling its checks, the cost
of advancing funds; the rate to be charged to be slightly
higher than the lowest discount rate established;
Sixth:
Every Federal Reserve Bank is authorized to receive
checks from other Federal Reserve Banks, or under such
rules as may be prescribed, from member banks in other
Districts, where such routing will save time, but in all
cases only for the credit of the Reserve District repre
sented by the sending bank and upon terms similar to those
upon which it receives checks from its own member banks.
Seventh:
It is proposed, under this plan, that every Federal
Reserve Bank shall be authorized to pay its own member banks
a fee for acting as its agent in the collection of checks
drawn against non-member banks.
Eighth:
It is quite likely that it will be found necessary to
create collection agencies at various points, especially
in Districts of large area.
The working out of this
system of collection agencies and their establishment is
a matter of detail which will follow in due course and will
undoubtedly greatly reduce the so-called "float".
1072
MEMORANDUM ON PROPOSED AMENDMENTS TO SECTION 16 OF
THE FEDERAL RESERVE ACT NCW UNDER CONSIDERTION BY THE FEDERAL RESERVE BOARD.
C. S. H.
May 1, 1916,
The amendments proposed are designed to seduro live princi
pal objects which will b3 considered Separately.
I.
Bills of exchange and bankers1 acceptances purchased in the open
*
market by Federal reserve hanks, undor Section 14 of the frodoral JRosorve Act, mav servo as collateral for the issue, by tho Foderal Re
serve Agent, ol Federal reserve notes, provided that the accentor or
one of the Indorsers is a member bank of any Federal Reserve District..
Under the present law the collateral for Federal reserve notes
is limited to notes and acceptances discounted, under.Section 13 of the
Act, by the Federal reserve bank for a membor bank and indorsed by the
member bank.
Under Section 14, however, Federal reserve banks are author
ised to buy such bills or acceptances in the open market without the in
dorsement of a member bank, but such purchases are limited to paper of
the kind and maturity which would be oligible for discount by tho Fed
eral reserve bank under Section 13 if offered by a member bank.
Such purchased bills and acceptances, when not indorsed by
a membor bank, can not be accepted by the Federal Reserve Agent as
collateral for the issue of Federal reserve notes, for the reason that
they would not represent a rediscount operation with a member bank, and
such notes can only be issued, under the present law, when growing out
of such a rediscount operation, as it is only through such operations
that a member bank Gan avail itself of the reserve deposits required
to be maintained in the Federal reserve bank* If such paper were pre
sented to the Agent by a Federal reserve bank, the lack of an indorse
ment by a member bank would show conclusively that the paper did not
grow out of a rediscount operation with a membor bank. •
On the other hand, the Federal reserve bank might present
paper to the Agent upon which tho last indorsement was that of a mem
ber bank, but the paper may have been bought in the open market,
1073
through the medium, for example, of a note 'broker.
Under such circumstances, the Federal Reserve Board has
ruled that such paper could be received by the Agent as collateral,
inasmuch as the indorsement of the member bank makes the paper, in
effect, arise out of a rediscount operation whether directly at the
request of the member bank or indirectly, a3, for example, through the
medium of a note broker.
As a matter of fact, the Agent could not
know whether the indorsement of the member bank represented a re
discount or a purchase, and in such a case the distinction would not be
material as the benefit of the transaction enures to a member bank whether
through rediscount or purchased
After careful consideration the undersigned has
reached the conclusion that the law should be broadened so that the
Agent may accept as collateral for Federal reserve notes, any bills
or acceptances* lawfully purchased under Section 14, which are either
accepted by or indorsed by a member bank of ^any Federal Reserve District,
To illustrate:
A in Buenos Aires
s©lls merchandise to B in
Boston and, by arrangement, draws a bill of exchange upon a non-member
trust company, C in Boston,,payable to the order of A.
A then in
dorses the bill and discounts it with Bank D in Buenos Aires.
D in
dorses it and sends it to its correspondent E, a National Bank in
Boston.
E presents it for acceptances to C in Boston and having in
dorsed it, later sells it to the Federal Deserve Bank of New York.
It is a matter of some doubt; under the present law whether
this bill could be received by the New York Federal Reserve Agent as
collateral for the issue of Federal reserve notes, for the reason that,
although indorsed by a member bank, it could not have originated out
of a rediscount operation with a New York member bank as E, Although
a member bank, is not a member bank of the Federal Reserve District
of New York, and only member banks of the New York District
can
V.
obtain rediscounts from the New York Federal Reserve Bank,
Under the proposed amendment, however, this bill could serve
as collateral for Federal reserve notes and there is no reason why it
should not be pccbitted so to serve, as the acceptance is guaranteed
by the indorsement of a member bank although not of the Federal Reserve
District of New York.
To take another illustration:
A in Buenos Aires, draws a
bill, by arrangement, upon B, a National Bank in New York City, payable
to A ’s order.
A indorses the bill and discounts it with Bank C in
Buenos Aires.
Bank C indorses it and sends it to its correspondent D
a non-member trust company of New York City.
D presents it for accept
ance to B and then sells it, with or without its indorsement, to the
Federal Reserve Bank of New York.
Under the present law, this bill oould not serve as collateral
for the issue of Federal reserve notes, as, there being no indorsement
of a member bank upon it, the bill would show on its face that it did
not arise out of a rediscount operation with a member bank.
Under the proposed amendment, however, this bill could serve
as collateral as it is accepted by a member bank.
The real reason
advanced for the objection to such a bill serving a3 collateral for
Federal reserve notes is not from any doubt as to the due payment of
the acceptance, but from the fact that permitting such bills to serve
as collateral would have the effect of giving the rediscount privilege
to other than member banks, which would be
contrary to the spirit of the
Federal Reserve Act.
It should be remembered however, that the Federal Reserve Act
permits Federal reserve banks to purchase such b ills and acceptances
in the open market in Order that they may invest tholr available funds
at times when there is a falling off in the demand for rediscount opera
s'i or that they may make their discount rates effective,
tions by member banks£_/ If, therefore, such bills and acceptances can
lawfully be purchased
under Section 14 there would seem to be no good
reason why such purchases; all representing paper which would bo eligi
ble if offered for rediscount by a member bank;should not serve as
collateral for Federal reserve notes.
The fact that thereby benefits are incidentally given to a
non-member bank is not a valid objection,because the transaction is
entered into for the direct benefit of the Federal reserve bank, and
- 4 -
for no other^ purpose,
member bank
The incidental bendfit received by a non
not being a valid objection to granting to Federal
reserve banks the power to purchase the paper in the open market,
should not, by parity of reasonings,bo allowed to serve as an ob
jection to Federal reserve banks paying for such purchases by Fed*
eral Reserve notes taken out against the purchased paper as col
lateral, for the sole benefit of the Federal reserve bank.
Under the present law, when such bills or acceptances are
purchased from any holder other than a member bank,the payment must
necessarily be made in cash, drawing down the cash resources of the
Federal reserve bank.
The reason for this is that the seller not
being a member bank, could not accept a book credit in payment for the
sale, and, the acceptance not being eligible as collateral for Federal
reserve notes, the bank could not obtain the Federal reserve notes out
of thi3 transaction with which to pay for the purchase,
Furthermore, under present conditions in the money market,
even though the purchase were made f.cr . a member bank on its indorse
ment, the member bank would usually take the purchase money in cash,
or if accepting a book credit, would at once draw against it.
In
the latter case, however, if the law were amended, Federal reserve
notes could be issued against the pledge of the acceptance which the
member bank selling the acceptance very likely would be perfectly
w illing to receive in payment.
There would seem therefore, to be no good reason for not
amending the Act so that paper purchased, having on it the name of a
member bank as acceptor or indorser, can serve as collateral for the
issue of Federal reserve notes.I.
II.
Collateral pledged with the Federal Reserve Agent, either gold
or pacer, may be withdrawn bv the Federal reserve bank and other col
lateral. either -pacer or gold, substituted therefor
6Z1- 1076
- 5 -
The present law permits the withdrawal of collateral and the
substitution of other like collateral, and this amendment simply strikes
out the word “like” , thus permitting the exchange by the Federal reserve
bank with the Federal Reserve Agent, of gold for commercial paper, or of
commercial paper for gold.
Under the present law only commercial paper and bills in foreign
trade can be pledged as collateral for Federal Reserve notes.
One of the
proposed amendments, however, which will be considered in detail later,
permits gold to be thus pledged as collateral as well as commercial paper,
and if this latter amendment should be enacted into law it will be most
desirable to permit the exchange of one kind of collateral for another,
as above indicated.
III.
Federal reserve notes may be originally issued against the deposit
of gold with the Federal Reserve Agent to the face value of the notes to
be issued, and in such case the Federal reserve bank need not carry in
its vaults a 40% gold reserve against outstanding Federal reserve notes
so covered by gold.
Before considering this amendment it may be well to point out
that "issue" in the amendment means issue by the Government, and, further,
that notes can only be issued by the Government against the pledge of
commercial paper, under the present law, and against commercial paper or
gold, or both, under the amendment.
The first object aimed at in the above amendment can now be
accomplished in effect under the present law, although indirectly, but
none the less legally.
Before discussing this proposed amendment, there
fore, it may be well to consider present methods by which the first re
sult reached b y the above amendment is attainable and in fact, attained
under the present law.
Under the Act, as it now stands, as above stated, Federal reserve
notes can be issued by the Federal fieserve Agent only against the de-
631
*6posit of commercial paper.
When once the notes have been issued# however#
by the Federal Reserve Agent, the present law permits the Federal reserve
bank to pay to the Federal Reserve Agent the face value of the notes in
gold#receiving back from the Agent the commercial paper originally de
posited.
This follows from the language of Section l6#which reads as fol
lows !
ttAny Federal reserve bank m y at any time reduce
its liability for outstanding Federal reserve notes
by depositing with the Federal Reserve Agent# its
Federal reserve notes# gold# gold certificates or
lawful money of the United States. "
Wien, therefore# such a payment of gold has been made by the
Federal reserve bank to the Federal Reserve Agent the outstanding notes#
to the amount of such gold# are in the 3ame position# practically# as if
they had been originally issued against gold by the Agent#- with certain
qualifications which m i l be explained later.
For example# the weekly statement issued by the Federal Reserve
Board showing the condition Of the Federal reserve banks on March 17# 19i'S#
showed# under the head of ’•Liabilities''# that the twelve Federal reserve
banks had# on that day# outstanding Federal reserve notes on which they
were liable to the amount of 11.9 millions of dollars# which wae
further
reduced by 1»7 millions# the amount of such notes held among the assets
of the banks# making the net liability only 10.2 millions of dollars. On
the other hand# the daily Treasury Statement# published by the Secretary
of the Treasury for the same day# showed that there were 1 9 1 . 1 millions of
Federal reserve notes outstanding as a liability of the United States
Government.
Both of these apparently inconsistent statements were correct#
for the reason that on that day# while the Federal reservebanJfip bad
■riginally taken out 191*1 millions of Federal reserve notes against the
-
7-
631
deposit of commercial paper, they had later deposited with the Federal
Reserve Agent, in gold, the sum of 179*2 millions, and thereby, under
the clause of Section 16 above quoted, had "reduced"their liability
upon 179*2 millions of Federal reserve notes*
Thus ;the outstanding
Federal reserve notes were in the same position as if 179*2 millions
had been originally issued against gbld deposited with the Agent and
11*9
millions or 10 .2 millions net, above referred to, had been orig-
ingally issued against the deposit of commercial paper.
The statement, made in the last paragraph, that the banks,
by the payment to the Federal Reserve Agent of 179*2 millions of gold
had thereby "reduced" their liability upon 179*2 millions of Federal
reserve notes requires some explanation.
What the word "reduced" really means is that the banks,
by this payment, are released from the necessity of carrying any re
serve against notes so paid and also that they need not henceforth
include them among their liabilities.
All outstanding Federal reserve notes, however, can be
presented at any one of the twelve Federal reserve banks for redemp
tion and, therefore, could be so presented to the banks which had
paid their full value to the Federal Reserve Agent, as in the example
cited above*
The banks, therefore,
by making the payment of said 179*2
millions to the Federal Reserve Agents, merely reduced their liability
to carry a reserve against these notes and are, therefore, permitted,
and in fact, required by the clause of Section l 6 above quoted, hence
forth to exclude them as outstanding liabilities.
The general obligation, however, imposed by the Act upon
all Federal Reserve banks,- to redeem all Federal reserve notes, by
whatever Federal Reserve Banks issued,- remains undiminished, but is, of
course, not set down as a liability in Federal Reserve Bank statements.
~
'
■
&
31
1079
From time to time criticisms have been made upon the action of
Federal reserve banks in taking out Federal reserve notes against the
deposit of commercial paper and almost immediately paying their face
value in gold to the Agent* taking back the commercial paper* - it
being claimed that this* if not a direct
violation of the Act* is at
least an evasion of the spirit of the requirement that notes can only
be issued against commercial paper.
Before considering whether this course* thus criticized^ vio
lates the spirit of the law* it may be well to point out that there is
no inflation of the circulating medium brought about by it* for every
note thus issued against the deposit of gold* - whether directly issued*
a3 under the proposed awendment*or indirectly* by the course above de
scribed under the present law is covered* dollar for dollar* by gold
withdrawn from circulation and impounded with the Federal Reserve Agent.
Or. the other hand* when the note is redeemed the contraction is overcome
%
by the return to circulation of the gold impounded.
It should also be pointed out*- as will be shown fully later*that if the existing National bank note circulation*- against which no
reserve other than the 5$ redemption fund is required*- were to be sud
denly wiped out and Federal reserve notes* secured by commercial paper*
substituted in its place* an immediate contraction of the outstanding
circulation would result from the necessity of carrying a UOf> gold re
serve in place of
the 5$ reserve carried against National bank notes.
What then is the reason for the above outlined process by
which the 191.1 millions of outstanding Federal reserve notes have
dwindled as a liability of the Federal.reserve banks to the comparatively
small amount of 11.9 millions* or* as pointed out above*10.2 millions net*
by virtue of the impounding with the Federal Reserve Agent of 179*2
millions of gold t
At the outset'* it must be apparent that this impounding
of gold with the Federal Reserve Agent must have been of some benefit to
the Federal reserve banks, or it would not have been so impounded.
What this benefit is * is not difficult to understand. Under
the present law the benefit is*
631*
j
1080
*» 3 »•
(a)
If a bank has made an excess deposit of gold and later des
to withdraw it, but is willing to accept Federal reserve notes, every
available Federal reserve note in the bank vaults will help the
bank to satisfy the demand of the member bank without depleting
’
its gold supply, and by securing such notes, by the deposit of gold
with the Agent, a gold fund is built up which is available, at any
*
time, for rediscounting purposes.
(b}
If the Federal reserve bank finds-that the demands for re
discounts by member banks have fallen off so that the bank needs
some other source of earnings for its expense and dividend purposes,
by paying out Federal reserve notes already issued to it, it can
purchase in the open market eligible bills of exchange or bankers*
acceptances, (not bearing the indorsement of a member bank, and
hence not directly eligible as collateral for Federal reserve notes),
and thus secure needed earnings, and, although not retaining the
gold in its asm vaults, by placing it in the hands of the Agent, it
is rendered available if later needed.
It may,however, be pointed out that, leaving out of considera
tion excess deposits, a member bank can never draw gold from a Federal
reserve bank except by offering commercial paper for rediscount and
that such paper when offered for rediscount will serve as collateral for
^
the issue of Federal reserve notes which can be given to the bank if
it will take them, in return for the paper rediscounted.
This is undoubtedly true, and if there were no excess deposits
of gold made by member banks, the only benefit to the Reserve banks,
from the indirect method of issuing notes against commercial paper and
f
later paying gold to the Agent, taking back the paper, would be that
described under (b) above, - thus enabling the reserve banks to increase
their investments by purchase, with these Federal reserve notes, of bills
and bankers' acceptances which could not be directly discounted because
of the lack of an indorsement Of a member bank.
The underlying spirit of the Federal Reserve Act, however,
is to encourage the member banks to make excess deposits.
With a satis
factory system of check cleanaioes in operation, excess deposits must
631.
- 8 a inevitably result.
Furthermore, the burden of maintain
ing the gold standard of value, although primarily upon the
Government, yet will in effect be and is placed upon the Fed-
1081
-
9
-
631.
eral reserve banks under the Federal Reserve Act, as they must pay all
their disbursements, whether by way of rediscount operations, clearing
balances, or withdrawals of excess deposits, in gold.
If they ceased
to do this, while they could, under the Act, unddubtedly discharge all
their obligations in lawful meney, i. e. in greenbacks, silver certifi
cates or silver dollars, yet such a course would inspire distfuat and
would throw upon the Government a very heavy burden in keeping all our
money on a parity with the gold standard, that is, in exchanging for
gold the disbursement of the Federal reserve banks made in lawful money.
It must also never be forgotten that the business exchanges of
the country rest upon a lawful money basis and that it is the duty of
the Government to maintain theso exchanges upon the gold standard basis.
The Federal reserve banks, through the gold clearing fund, - as between
one another, - and by virtue of gold payments to the member banks^are
helping the Government materially in keeping all exchanges upon the gold
standard of value, and every assistance which Congress can give to tite
reserve banks in this work should, and it is confidently believed will,
be given.
Returning now to the indirect method followed by the banks of
taking out Federal reserve notes against commercial paper and immediately
paying, in gold, to the Agent, the full amount of such notes, the question
arises what immediate gain do the reserve banks derive from this circuitous
process.
The answer is that when the reserve banks have gold which can
not be used for taking out Federal reserve notes, because of tho lack of
commercial paper to pledge as collateral for the notes, they have found
by experience that they can take notes out against this gold by/circuitous process above referred to and hereafter more particularly described.
It is scarcely necessary to add that if the banks have on hand
.\ or can ‘Secure an ample supply of commercial paper, their note issuing capacit
greater
than
will be
by pledging such commercial paper
it could possibly
be by paying gold to the Federal Reserve Agent under said circuitous
process.
Even under such circumstances, however, the privilege afforded
-
10 -
631-
by the amendment of taking out notes against gold, will enable the
reserve banks to conserve their gold^as will be shown more particularly
later.
To illustrate this circuitous process* above referred to,
let us suppose that a Federal reserve bank desires to invest $200,000
in open market purchases of bills of exchange or non-member bank ac
ceptances.
It holds in its vaults $100,000 in Federal reserve notes
taken out against the pledge of $100,000 in commercial paper, and caft
obtain no more commercial paper to pledge with the Federal Reserve
*
Agent for additional Federal reserve notes*
Ih does not want to use
$100,000 in gold, wfoich it has available for such purchases, but wishes
to find some toay by which it can take out $100,000 additional notes
against this gold, using these notes for the purchases and thus con
serving its gold.
By employing the circuitous process now to be described it
can take out $1.00,000 in Federal reserve notes* based Upon this golfl
paid to the Agent* without securing any more commercial paper to pledge
with the Agent for such notes.
For example, it already holds $100,000 notes secured by the
pledge of $100,000 commercial paper.
As a first step it would pay
to the Agent $100,000 in gold thus releasing its $100,000 of commercial
paper.
As a second step, it could redeposit the $100,000 commercial
paper with the Agent and take out $100,000 additional of Federal reserve
notes.
The bank would then hold $200,000 of Federal reserve notes
secured by $100,000 commercial paper and $100,000 in gold, and it c.-ould
use these $200,000 of Federal reserve notes in making its open market
purchases and thus conserve its gold.
The above indicates the exact steps taken by the Federal
reserve bank which it is claimed, constitute a violation or at least an
evasion of the spirit of the law.
It is certainly clear that each step taken by the bank, in
the above illustration,
is in literal compliance with the law.
The
notes were originally issued on the pledge of commercial paper, and
1083
631.
- 11 -
and when issued became a liability of the bank.
When, however, the
bank paid to the Agent $100,000 in gold, the liability of the bank on
these notes was from that moment
"reduced"
The resources of the
bank were decreased by the exact amount of the payment in gold, and at
the same time the liability of the bank upon the notes was
extinguished
In other words, at least, in a technical sense, the bank made
the payment for the purpose, - to quote the words of the statute, of "reducing".
its liability upon the notes.
The liability upon these notes, however, thus
"reduced"
as to the bank, remains undiminished as to the Government, but the
Government, to meet its continuing liability, now holds 100$ in gold,
through the Federal Reserve Agent, and the Federal reserve notes, a3 to
the Government, at least, now become in effect a gold certificate upon
which the Government only is liable, but to redeem which it holds 100$
in gold.
If there were no demand for Federal reserve notes for circu
lation purposes these notes would come back very quickly for redemption*
The Government would redeem them and that would end the matter.
There
being % demand^ howeVer> as we assume^ for suoh notes for circulation
purposes, they may remain outstanding indefinitely.
The bank, however,
from the moment of its payment to the Federal Reserve Agent, has parted
*
with its gold and has
^reduced1'
its liability upon these notes.
The criticism, however, might be made that the Government,
which originally issued the notes through the Federal Reserve Agent, is
now practically in the same position as if it had originally issued these
notes against the deposit of gold, rather than of commercial paper, and
that the provision of the Act that notes can be issued originally only
against the deposit of commercial paper has been evaded by the course
thus pursued by the Federal reserve bank.
In this connection, however, it. should be pointed out that
thi3 same result may be reached directly, even without the payment of
gold by the bank to the Agent, in a regular normal way.
For example,
suppose that a Federal reserve bank takes out $100,000 in Fsderal
reserve notes against the pledge of commercial paper, as in the above
1084
631.
- 12 -
illustration.
The Federal rosorve notor. havo no definite maturity, -
they remain an obligation until finally redeemed*
Let us suppose,
however, that the commercial paper runs only for three months.
At
the end of that period the maker of the paper must pay the notes to
the lawful holder, that is, to the Federal Reserve Agent.
Th«? Agent
will then be in the same position, practically, a3 if the bank had paid
him the $100*000 in gold, as in the above illustration, the ddy after
the notes had been issued to the bank, - for the
cial paper at maturity will
payment of this commer
"reduce" the liability of the
bank upon
these notes in precisely the sane manner, whether the payment is made by
the maker of the commercial paper at maturity, or by the bank before
maturity,
In either case, however, the liability of the Government
remains unchanged.
Tho above would seem to show conclusively that the course taken
by the Federal reserve bank, above described, is at least, in technical
compliance with the law.
The question remains to be answered* however,
whetherj admitting suck a technical compliance> the course followed is
not really an
evasion of the spirit of the law*
VTnat, then, is tho
spirit of the law?It might be claimed to
be that Federal reserve notes should be originally issued only on the
pledge of commercial paper, and that a bank should only pay tho face of
the notes to the Federal Reserve Agent when it genuinely
desires to
."reduce" its liability upon the notes, or desires to secure the commercial
paper pledged with the Agent, so that it may be in its possession at
maturity ’when the maker or acceptor must pay it, and that the bank, evades
the spirit of the law by talking out the notes against commercial paper,
but almost immediately paying the amount in gold to the Agent, thus get
ting back its commercial paper and leaving the notes outstanding secured
by gold as if they had been originally issued upon such security.
The question would therefore arise vdiy, assuming, for the sake
of argument, that the above course evade.} the spirit of the law, the law
should now be changed so as to validate the above indirect process by
permitting the original issue of Federal reserve notes against the de
posit of gold as collateral rather than against the deposit of commercial
1085
paper.
To answer this question we must find the reason why the banks
desire this privilege and that reason has already been given, - viz: when the supply of commercial paper is falling off, and yet there is a
demand for cash the member banks must draw down their excess deposits in
the reserve banks and if the reserve banks can furnish Federal reserve
notes it will thereby conserve their gold; or, on the other hand when the
reserve banks desire to make investments, and have Federal reserve notes
on hand, they can make the investments and still conserve their gold,
So also, conversely, when the member bank* have an ample supply of gold
they will be glad to deposit it with the reserve banks taking back Fed/
oral reserve notes which at any time they can present to the reserve
bank for gold, and the issue of these notes against gold at times when
there may be a scarcity of eligible commercial paper, will put the re
serve bank in the position of being able to conserve its gold.
In the summer of 1914, for example* there was a profound
•
business disturbance growing out of the European War, and an extra
ordinary demand for currency.
Coincident with this demand for cur
rency there wds threatened a very great depression in business, which
would necessarily decrease the amount of commercial paper eligible as
collateral for Federal reserve notes.
If some future similar emergency
should arise, the member banks, not having the power to issue notes,
would have to draw down their excess deposits with the reserve banks
and pay out the gold thus withdrawn, which would very probably be
hoarded and disappear from circulation, while they could meet every
demand lor cash if they could receive from the reserve banks, Federal
reserve notes.
Experience may thus demonstrate that the present limitation
upon
the issue of Federal reserve notes to the amount of commercial
paper pledged as collateral would greatly hamper the usefulness to the
community of the issue of such notes, as the required collateral would
lend to decrease in amount while the demand for the notes as substitutes
for gold might, at the same time, increase.
It would seem, therefore,
1087
- 14 -
631.
most reasonable to permit the isstie of these notes either against commer
cial paper or against gold.
So, also, there might arise a demand for gold by some member
bank for export, and in this event, if the Federal reserve bank had the
necessary amount of gold deposited with the Federal Reserve Agent,whether
under the circuitous method used under the present law, or pledged with
the Agent, under the amendment, it could obtain this gold
tram the Agent
by substituting the consnercial paper rediscounted by the member banks to
secure the gold, and thus give to the member bank the gold so withdrawn
from the Agent*
An interesting table, prepared by Federal Reserve Agent Jay,
(Appendix X and II), demonstrates that gold thus withdrawn from the Agent’s
possession does hot diminish the credit power of the Federal reserve bank,
but, on the contrary, protects that credit power from the inevitable de
crease resulting from the payment of the gold directly from the bank’s
vaults*
Mr, Jay shows conclusively that the gold thus deposited with the
%
Federal Reserve Agent Increases the credit power of the bank to the extent
of 50$ of the amount of gold deposited.
The proposed amendment would also, at the present time, at
least, operate most conservatively, correcting any present tendency toward
undue oipansion caused by the great inflow of gold into the United States,
for every dollar of this gold which could be secured by the Federal re
serve banks from member banks in return for Federal reserve notes, would
be taken out of the vaults of the member banks and impounded in the Fed
eral reserve banks.
Furthermore, every dollar of gold which a Federal
reserve bank could deposit with the Federal Reserve Agent as a basis for
Federal reserve notes would be a use of this gold by the issue of the
notes simply dollar for dollar; that is to say, there would be no expan
sion whatsoever in the circulating medium, because for every, dollar of
notes issued by the Federal reserve bank a dollar in gold would be im
pounded with the Federal Reserve Agent.
631.
The amendment, furthermore, would enable the Federal re
serve hainks to lay down and maintain, under the guidance of the'
Federail Reserve Board, a uniform, National policy of conservation
of the gold supply of the United States,
For the above reasons, it would seem most advisable
that the law should be amended,
1088
1089
631-
- 15 -
as indicated above, so that Federal reserve notes nay be issued by the
Federal Reserve Agent against the deposit of gold as well as of com
mercial paper.
The adoption of this amendment would a.lso correct the curious
anomaly, - pointed out above, - the4*re^uc^^onr of the bank’s but not of
Governments
the
•/Liability, - which results from the payment to the Federal
Reserve Agent by the bank, in gold, after the original issue of the
notes against commercial paper; for under said amendment the Federal
reserve notes, instead of being paid in gold after their issue by the
bank, as under the present circuitous process, will be issued originally
to the bank upon the deposit of gold, so that as a result the liability
of the bank upon these notes will continue the same as the liability of
the Government, - until their final redemption.
The apparent inconsistency between the Federal reserve bank
statement and the Treasury statement, pointed out above, will also be
*
removed by the passage of the amendment, and the total note liability,
both of the banks and of the Government, will be the same, that is, they
both will be liable for the total amount of Federal reserve notes out
standing, until final redemption, and the two statements will be in
perfect harmony.
The above amendment also provides that where a Federal reserve
bank has taken out Federal reserve notes on the deposit of gold with the
Agent it need not keep the reauired ^40$ gold reserve in its vaults
_____
against such notes.
In the indirect operation described above, whore the bank
takes out the notes originally against the pledge of commercial paper
but later pays the full amount in gold to the Agent, the bank, after the
payment, need keep no gold reserve in its vaults against these notes, fo1"
the good and sufficient reason that the payment of the gold has
‘‘reduced*'
its liability *©n these notes; therefore, no reserve need be maintained. *-—
Similarly, under the proposed amendment, the original issue
of Federal reserve notes to the reserve bank against the deposit of 100$
gold, will leave the bank liable upon these notes as well as the Government)
- 16 -
631.
but the Government having in its hands 100$ in gold with which to
pay them, the bank need keep no reserve, for, if presented by the
holder to the bank for payment the bank would merely turn the notes
over to the Agent who would redeem them from the 100$ in gold in his
possession for this purpose.
The exact measure of expansion under this proposed amendment,
as compared with the maximum expansion under the present law will be
shown in detail later.
IV.
The right of the Federal reserve bank, described above under
HI.
to nav to the Agent in gold, etc., the full value of outstanding
Federal reserve notes and thus "reduce" the liability of the bank upon
s_uch n otes is repealed by the omission of the paragraph of Section 16
hereinbefore quoted, granting this privilege.
It is also provided
that any rate of interest which mav be charged bv the Federal Reserve
Board unon Federal reserve notes sh3.ll not be applicable -to such notes
when and as lone as secured bv gold deposited with the Agent.
The object sought by this proposed amendment is to maintain
the liability of the banks upon all notes issued until they are finally
redeemed, thus making the liability precisely the same as that of the
Government.
This change will also bring about, harmony between the
daily statement of the Treasury and the Federal reserve bank statement,
and will remove the apparent inconsistencies pointed out above under III,
It would seem also desirable to provide, - as does the pro
posed amendment, - that in so far as the Agent holds gold pledged against
outstanding notes, the bank should be released, pro tanto, from payment
the
of any interest charge imposed by the Federal Reserve Board upory1out
standing notes, as such notes,. - in so far as they are secured by pledge
gold, do not constitute, an increase in the circulating medium, but are,
to the extent that gold is pledged against them, - to all iaients and
purposes, merely gold certificates.
Under such circumstances it would
seem as unreasonable to impose an interest charge on such proportion of
the notes, thus secured, as it would be to impose such a charge upon
the gold for which the notes have become, pro tanto, to all intents and
purposes, merely a warehouse receipt.
1090
Federal reserve notes ma y also be issued not only against the deu
•posit of 100$ in gold with the Agent, but as well, against the deposit of
paper and gold, and further, the gold so deposited as collateral with the
Federal Reserve Agent shall be counted pro t ant o and included as if in the
vaults of the bank as its gold reserve against outstanding Federal re
serve notes in actual circulation.
To illustrate:
1*
Suppose a Federal reserve bank takes out one million dollars in
Federal reserve notes pledging, under the amended law, as collateral 60$,
or $600,000, in eligible paper and 40$, or $400,000, in gold.
The effect of the above amendment would be that the reserve
bank would count the $400,000 gold deposited with the Agent as its 40$
required gold reserve just as if it were actually carried in its vaults,
and need carry no reserve in its vaults against such notes.
2.
Or, in the alternative, let us suppose, that the reserve bank
takes out one million dollars in Federal reserve notes, pledging, under the amendment, as collateral, 80$, or $800,000,in commercial
paper and 20$, or $200,000, in gold.
The $200,000 deposited with the
Agent would count as one-half of the required 40$ reserve, but the
reserve bank would have to carry $200,000 gold as reserve in its vaults,
which, together with the $200,000 deposited with the Agent, make up its
required 40$ gold reserve.
Under stach circumstances, however, the bank
would probably deposit with the Agent the $200,000 free gold, and take
back a similar amount of commercial paper, leaving the situation the same
as in 1. supra.
3.
Or, again, let us suppose that the Federal reserve bank takes
out one million dollars of Federal reserve notes, pledging with the Agent,
as collateral, $400,000 paper and $600,000 gold.
Under the amendment,
the Federal reserve bank would be in the same position as if the
$600,000 gold were still in its vaults, that is, it would have $400,000
as a 40$ gold reserve and would have $200,000 free gold which could
serve as a reserve for further issues of Federal reserve notes, but not
as a reserve against deposits.
631« i1092
- 17 a -
It is to be noted that illustrations 1 and 2 could be as
pointed out supra, indirectly accomplished under the present law,
by the payment of gold to the Agent after the notes had been issued
\
\
.
\
\
\\
\
,
- 18 -
1093
631 •
against 100$ commercial paper, i.e. the.same situation would result, the notes outstanding would he the same -
one million dollars - at
least as to the Government liability; - and the Agent would hold com
mercial paper in part and gold in part as collateral, - 100$ in all.
The reserve situation, however; would be very different,
comparing the present law with the proposed amendment.
For example, under 1. supra, the $400,000 payment to the
Agent would cancel the banks liability cn $400,000 Federal reserve
notes but the bank would have to carry in its vaults a gold reserve
of 40$ upon the $600,000 Federal reserve notes covered only by com
mercial paper, i.e. a gold reserve of $249,000.
So also in 2. supra, under the present law, the bank
must
carry in its vaults in gold 40$ of $800,000 or $320,000.
So also, in both 1 and 2, supra, under the present law,
the payments to the Agent would be subtracted from the gold resources
of the bank.
Under the proposed amendment however, in illustration 1
supra, the payment of $400,000 to the Agent would not extinguish the
liability of the bank upon $400,000 of Federal reserve notes.
On the
contrary, these notes would remain as an outstanding liability of the
bank.
So also, the bank would not have to keep any reserve against
these notes in its vaults, for the $400,000 pledged with the Agent
counts as if it were in the bank vaults, a3, instead of being raid
to the Agent to
reduce
liability it is now pledged with the Agent
as security for a continuing liability, and being counted as if actually
in the vaults of the bank it would count as its 40$ gold reserve.
So also, in 2 supra, under the amende! law the $200,000
pledged with the Agent would necessitate only $200,000 gold to be carried
by the bank in its vaults, instead of $320,000, as under the present law.
So also, in 3 supra, the bank would count the $600,000 deposited
with the Agent as if it were cash in the vault and it could, therefore,
have, theoretically, its 40$ gold reserve and also $200,000 free gold
/
1094
631,
- 19
actually in its vaults* as a basis for further Federal reserve note
issues.
The first objection which may be advanced against the pro
posed amendment is that it permits an expansion of note issues,
!
As 1 iatt, however* rashere the bank can secure ample commercial
paper, no more notes could be issued under the amendment than uijder the
present law, and the amendment would merely permit a substitution of
gold as collateral in the place of commercial paper,
\
On the other hand, assuming that the bank has e, g. 400\mil~
\
lions of free gold and only 600 millions of commercial paper, the atoendment would admit of an additional note issue limited to the exact amount
of the gold deposited with the Agent as collateral,
„
\
The total note issue, however, could in no event exceed 100$
and
of the total
collateral, paper
Igold, pledged with the Agent; nor
could the total note issue in any event exceed 2t times the free gold
owned by the bank, - 400 millions, - whether the gold is held in the
bank's vaults or pledged with the Federal Reserve Agent.
v
It would seem reasonably clear that expansion to this extent
is not undue but is consistent with soufcd banking,
It should also be pointed out that, whenever Federal reserve
notes are placed in circulation as a substitute for retired national bank
circulation an actual contraction of the circulation takes place.
This will at once be seen from the following tables.
example, there are today about 735.7 millions of national
\
\
For
1095
- 20 -
631.
bank notes in circulation and about 1928 millions in gold coin or
certificates*
Let us, then, assume that these National bank notes
are removed from circulation over night and that their place is to
be filled in the circulation by an equivalent amount of Federal re
serve notes, the Federal reserve baixks having an ample supply of
commercial paper to pledge with the Federal Reserve Agent against
the issue of the Federal reserve notes.
Tbe-account would stand:
■
Reserve,
735*7
735*7
I
1928
3 6 ,8
2663
*7
735.7 u. s.
bonds
—
2. Federal Re
serve Notes
Notes and
Security held
gold in cir-by U.S.Treasurer
culation
or F. R. Agent
1
;!
~ m
1. National
Bank Notes
Gold in
circulation
1
294.2
Contraction
1670.6
24 o 6*3
257.4
257*4
735*7 Commercial
. . . . . . . paper.
Thi3 shows that, under Section l6 as now in force, if
millions of Federal reserve notes were substituted fDr the
735*7
735*7
mil
lions of National bank notes now outstanding, the gold reserve require
ment for Federal reserve notes would result in a contraction of gold in
circulation of
257*4
millions, - the amount of the excess of said gold
reserve, - 294.2 millions, - over the reserve required for National bank
notes, -
or
36.8 millions.
Let us now
suppose that the proposed-amendment has been
enacted into law, and that the Federal reserve banks have only 44l»5
millions of commercial paper, and that they take out 735*7 millions of
Federal reserve notes by pledging 44l«5 millions in commercial paper
(60$) and 294.2 millions <40$) in gold.
The account will then stand:
631
1096
21 -
Reserve
1. National
lank notes
735.7
2. Federal re
serve notes
Present law
735.7
1928
2663.7
735.7 U.S.
Bonds
1670.6
2406.3
735.7 Commer
cial paper
V
3. Federal re
serve notes
Law as amended 735.7
4. Federal re
serve notes
36.8
Security held by
Notes and
U.S.Treasurer or
gold in
Gold in
F.RJUent
dirculation circulation
1164.8
294.2
(36,8 +
257.4)
(294.2)
(36.8 +
257.4)
465.9
(36.8 +429.1)
1670.6
1498.9
2406.3
2663.7
(441.5 com(mercial
735.7( paper
(294.2
( gold .
1164.8 Commer
cial
naner
Line 3 above shows just what the proposed amendment would accom
plish, - it permits the bank to carry its required reserve in the Federal
Reserve Agents' trust fund where it is available for the issue by the Agent
of 294,2 millions of Federal reserve notes, dollar for dollar.
It will be noticed that the reserve of 294.2 millions in line 3
supra, is put in brackets, for the reason that it is not in faot in the
bank vaults but is carried by the bank, - as the amendment permits, with
the Federal Reserve Agent.
The gold in circulation is, however, contracted by the same
amount, - 257.4 millions net, - as though the notes were issued as in line
2, under the present law, the same reserve being required, but permitted to
be carried, under 3, with the Federal Reserve Agent.
It is interesting to note here that', in order to prevent any
contraction in the total notes and gold in circulation, - 2663.7 millions,
as shown in line 1, a much larger amount of Federal Reserve notes would
have to be issued.
This can be shown by the following algebraic formula:
Let X s the required amount of Federal reserve notes to be issued.
Then 40/l0Q X will be the required new reserve.
The formula will then stand: X - 735.7 - 2/5 X - 36.8.
That is to say the new amount of notes to be talien »ut minus the
735.7 millions now outstanding will equal .the new required gold reserve
minus 36.8 millions, - the amount of the 5% redemption fund for national
bank notes:
Then:
X - 735.7
+ 36.8 = 2/5 X
X - 698.9 I 2/5 X
X - 2/5 X ! 698.9
3/5 X I 698.9
X/5 = 232.96
X = 1164.8
Transferring these figures to line 4 in the above table, we
will see that to keep the total notes and gold in circulation the same
as when the national bank: notes were outstanding, there must be issued
1164*8 millions of Federal reserve notes, instead of 735.7 millions.
The gold in circulation would then be contracted by 465.9 minus 36.8
millions (the amount of the 5$ national bank redemption fund)
Z 429.1
millions, but the same amount, - 421.9 millions, - of Federal reserve
notes would be added to the 735.7 millions of notes outstanding, and
this would make the total notes and gold 2663.7. mill ions, - the same
amount as was outstanding in line 1 of the table.
This issue could not be made, however, unless the banks
had or could secure 1164.8 millions of commercial paper.
It may be asked, however, what amount of Federal reserve notes
the reserve banks could issue under the present law, by using the cir
cuitous process above described, that is, by paying to the Agent all
free gold in the bank‘s vaults, thus releasing a similar amount of com
mercial paper, and then repledging the Commercial paper for a similar
amount of additional Federal reserve notes.
Using the process above described, assuming that the reserve
banks have only 441.5 millions in commercial paper and 294.2 millions
in gold, they could take out only 441.5 millions of notes against the
pledge of commercial paper, but could then pay their free gold, - 117.6
millions (the balance, - 176.6 millions being held as a 40$ gold reserve
against the 441.5 millions of notes outstanding) to the Agent, taking
back 117.6 millions of commercial paper and later repledging the com
mercial paper for 117.6 millions of additional Federal reserve notes.
1098
631.
- 23
Thd account would then stand:
Rediscounts
441.5 Federal
Reserve Rotes 441.5 Rediscounts 441.5
Gold
Capital
F. R. Rotes
294.2
117.6
F. R. Rotes 559.1
117.6
735.7
Gold
735.7
559.1
559.1
Thus, hy using the circuitous process, the Federal reserve
banlcs, under the present law, could taka out 559.1 millions of Federal
reserve notes, being 117.6 millions more than they could take out with
out recourse to the process above described; the additional 117.6 millions
of notes, however, would constitute a liability only of the Government
and not of the banlcs.
The following table gives the results of the various methods
above described:
(See following page)
a
05
©
Notes
1. National Bank
735.7
Notes
Present
Law:
2. Federal Reserve Notes
Notes issued vs. com. paper
735.7
Direct method
Federal Reserve Notes - Present Law:
Notes issued vs. com. paper
Direct method
To make total notes plus
Gold in circulation the
1164.8
Same as in 1_________
Federal Reserve Notes Assuming Federal Reserve
Banks can secure only 441.5
com. paper and 294.2 in gold.
Notes issued vs. com. paper
Direct method____________ 441.5
03 ___
Same as 4
Federal
Reserve
Notes
. 5.
Clrcuitous method
*559.1
Proposed
amendment.
5~ Federal Reserve Notes Assuming reserve hanks can
secure only 441.5 com.
paper and 294.2 in gold.
Notes issued vs. com.
735.7
paper and gold_________
Reserve
36.8
Notes and gold
Gold in
circulation in circulation
1928
Security held >y U. S.
Treasurer or . R. Agent.
2663.7
735.7 U. S. bonds
(36.8 f 257.4)
294.2
1670.6
2406.3
735.7 Com. 1*Lper
(36.8 i 429.1)
465.9
1498.9
2663.7
1164.8 Com, laper
(36.8 I 139.8)
176.6______ 1751.4
(36.8 Z 139.8)
*176.6_____ *1670.6
2192.9
441,5 Com. Pacer
(* 441.5 Com. Paper
(*117,6 Gold I
(36.8 Z 257.4)
(294.2)_____ 1670.6
*2310.5
(441.5 Com. Paper
(294.2 Gold
2406.3
735.7
* Note that the reserve in 5, - 176.6, - is the same as the reserve in 4, yet that 559.1 notes are outstanding in 5 and only
441.5 in 4. The reason is that the payment to the agent of 117.6 millions of gold operates to "reduce'’ the liability of the
banks on that amount of notes, while the liability of the Government isincreased by 117.6 millions. The banks being liable
only on 441.5 millions of notes need keep a reserve only against 441.5 millions.
Note also that the contraction of gold is the same in 2 as in 5, for the 117.6 millions of gold is taken out of circulation
equally whether held in the bank’s vaults, as in 3, or held by the Agent, as in 5.
V
1100
-6j 1-
-2'j-
The above table clearly*shows that, - when the banks have an
ample supply of commercial paper, - the amendment causes no expansion of
notes. It merely permits the same amount of notes to be issued, but
the requirement of the present law that the Agent shall hold 100$ com
mercial paper is contracted to
60
$, and the balance is made up of gold.
Tho table also shows that when the banks can not secure as
much commercial paper as their gold would sustain as a reserve for
Federal reserve notes, i. e., 2g- times as much, there is an expan
sion, dollar for dollar, by the exact amount of gold pledged in lieu
of commercial paper, but tho total amount of notes outstanding can
never exceed 2g- times tho total gold held by the banks, whether in
their vaults or pledged with the Agent, nor can the total amount ever
exceed the total amount of collateral, whether paper or gold, pledged
with the Agent.
It may be claimed, however, that in 3 supra, the 29^.2 mil
lions of gold serves two purposes, - both as reserve in the bank's vaults
and as collateral with the Federal Reserve Agent, - and that this gold
cannot serve two masters at the same time.
This latter proposition is undoubtedly true, but it has no
application to the present case, for although this
29 ^ *2
millions of gold
stands for two purposes and thus, in a sense, may be said to serve two
masters, it does not stand for both purposes or serve two masters at the
same time; on the contrary, it stands in the alternative for either at
any time. but not for both at the same time. and there is nothing incon
sistent or impossible in this dual but alternative relation.
A
similar alternative use of the 40$ gold reserve is found in
another portion of Section l6 which provides that the Federal Reserve
Banks must keep on deposit in the United States Treasury not less than
5$ in gold as a redemption fund, but that such deposit of gold shall
be counted and included as part of the Uo$ gold reserve to be main
tained by the Reserve Banks in their vaults.
Unquestionably,
tinder this clause, the Federal Reserve Board, at the request of the
1101
Secretary of the Treasury, could require the Federal Reserve Banks to de
posit their whole 40$ gold reserve with the Treasury, and we should then
see this gold reserve serving two masters, but the service would be only
an alternative service just as in the proposed amendment.
VI.
Let us now work out, step by step, just what note issuing
power a Federal Reserve Bank has under the present law and what it would
have under the suggested amendment, assuming only a limited supply of
commercial paper.
In Appendix II, this has been worked out in detail by Federal
Reserve Agent Jay and in Appendix III by Mr. Jacobaon, of the Statistical
Division of this Board, based upon the present resources, upon certain
specified days, of the twelve combined Federal Reserve Banks.
It may, however, be easier to follow the various steps by
taking a simpler illustration.
We will, therefore, assume that a
Federal Reserve Bank has, say, 400 millions of ’•bapital which has been
paid in in gold and that the bank has discounted 600 millions of com
mercial paper for member banks, pledging said commercial paper with the
Federal Reserve Agent for Federal reserve notes which the member banks
wish to draw out against their rediscounts.
i
The bank must keep in its vaults 240 millions of gold reserve
against the 600 millions of Federal reserve notes outstanding, and thus
has left 160 millions in gold which is free.
The bank would like to
impound this gold and at the same time use it in the shape of Federal re
serve notes so as to derive earnings from it.
We will assume that the supply of eligible paper has fallen
off and that the Bank can secure no more so that it can not utilize its
160 millions of free gold for taking out Federal reserve notes, having
no eligible paper to pledge.(
*
)
(*) By the term "capital", free gold is meant, in all the following tables.
The term "capital" is used in order to distinguish the free gold, entered
under this heading, from gold creating deposit liabilities and requiring
a separate 35$ reserve.
-27-
.6 3 1-
We will further assume, however, that paper eligible for
purchase in the open-market ( hut not eligible for rediscount for
lack of the indorsement of a member bank,) or U* S. bonds or Municipal
warrants for any part of
bOO
millions? have been offered to the bank
and that it is prepared to buy in the open-market as much of these
as it can pay for by the issue of Federal reserve notes based upon
the
16 0
millions of free gold in its vaults, assuming, at the same
time, that those who offer these securities or paper for sale are
willing to accept Federal reserve notes in payment*
The
question which then arises is what amount of
Federal reserve notes can the bank, under the present law, take out
and issue against this 160 millions of free gold* We can then com
pare this with the amount of notes which can be issued under the pro
posed amendment*
The answer to this question will be found from an
1102
,P
631
“’<£»O v~
PRESENT LAW
I.
The Federal reserve bank starts with 400 millions of capital
paid in in gold.
It has discounted 600 millions of commercial paper
for member banks, pledging said paper with the Federal Reserve Agent
against the issue of Federal reserve notes which the member banks draw
out against their rediscounts.
It desires also to invest in open market purchases, United
States bonds, or warrants as above assumed.
The account of the Federal reserve bank will stand as follows;
Reserve Bank,
Rediscounts “'600
pledged
W
ft
Redisceunts
______ free
Redi3C ounts
total
600
Gold paid to
F.R.Agent !
Gold in bank
400
vaults
Geld total
1 400
F. R. Notes
^Ui-_T
,im
m m
** 4
Federal Reserve Agent.
F.R.Notes 'Too
Rediscounts j
1 600*'*
¥
1
Capital
400
J,,,,.
,—
m m m
Jtoi.____11*000.__
■'“
.. . ...
1Gold
mamrrw.. m. . m
»—
...........
J
--- ---- .-------*»
i
\
j
-4
j^poo,........ n
.....
1600
F. R.
Notes
^
.«• . ...
600
r 6po5
Reserve.
40% of 600 - 240
Free gold * 400 - 240 * 160
Credit power. F. R. notes * 'l\ x 160 * 400.
The bank here has 160 millions free gold but it can not
take out Federal reserve notes against it directly under the present law
not having rediscounts to pledge, all its rediscounts - 600 millions having been already pledged with the Federal Reserve Agent. The bank,
however, can indirectly, but none the less legally, make a further is
sue of Federal reserve notes, even on its present holdings of redis-
1103
631
-20counts, by taking two steps as follows:
2.
£ t_ e £
1.
The bank pava 160 millions of gold which it has in its
vaults free, to the Federal Reserve Agent, taking back 160 millions
of rediscounts from the Federal Reserve Agent, under the provisions
of Sec. 16 above quoted.
The account will then stand:
Reserve Bank
Redisc bunts
L
pledged
440
F.R, Notes 440 ■ n » i » i . wRediscount
s.III naifuuo
m «iii
Km
Red iscounts
free_____ 160
Capital
400
Gold
160
Red isc ounts
total
600
Gold paid to
F.R. Agent
(160)
Gold
..... .
in v a u l t ____240
Gold
total
240
F. R.
Notes
- " B 40840
F.R.Notes_ 600
------
Reserve.
40?. of 440 « 176
Free gold s 240 - 176 s 64
Credit power, F. R. Notes 8 2f x 64 B 160
This operation leaves the bank with 160 millions in free
rediscounts
upon which a further issue, of Federal reserve notes can
2.
S t e £
be taken out.
2»
Let us assume that the Bank repledges the 160 millions of
free
rediscounts and that it takes out 160 millions of additional
Federal reserve notes.
The account would then stand:
Re servo Bank
Federal Reserve Aerent.
Rediscounts
‘’"Re-' “
pledged
600 F.R.Notes __600
Rediscounts
Gold
__ 160 .
___ free.____
»>waCapital
n—
-•**•mmmi -w 400
— -- ’--- --—
Rediscounts
{'
600
t o t a l ___
Gold paid to
F . R. Agent
.(ML) --- ■- **-----— — .,
— ...-~
Gold
in vaults
240
GQld •■• total ~240“
F.R.Notes
.„ .,. ,* . -.
. J.’TL'iipA®.®..-. .7 .60. . ___
ML
' Total
L.occ
^ l.coc' .... .
..7.60
,... . ' .
.■ 760 ...
1104
1105
Reserve.
40%
of 600 ■ 240
Free gold ■ 240 - 240 a 0
Credit power. F. R. Notes a 0
Thus by the two steps above described the Bank has paid
160 millions to the Agent and has thus ^reduced" its liability on
160 millions of Federal reserve notes.
This payment, however, has
released 160 millions of rediscounts which have been repledged for
160 millions of additional notes.
reserve notes
160
The bank'A liability for Federal
remains as before at 600
millions being offset by the 160
millions, the additional
millions on which the bank's
liability was '’reduced” by the payment to the Agent.
As the notes
are all outstanding, however, the liaoility of the Government is in
creased by 160 millions and now stands at 760 millions.
The oank still has 240 millions of gold in its vaults,
but this 240 millions it must keep as a 40$ gold
reserve against
the 600 millions of Federal reserve notes outstanding.
The total note-issuing power of the bank is thus seen to
be 760 millions.
It could therefore issue 160 millions of addition
al Federal reserve notes for the purpose of making investments other
than regular discount operations, for which latter, as assumed above,
«
there is no demand, and these additional 160 millions would be a
liability only of the Government.
3.
Let us now assume that the proposed amendment has become
law and that henceforth
Federal reserve notes may be issued by the
Agent originally against the deposit of gold, commercial paper, or
both.
jLf-Of>
-31-
-631-
Going back to I, we will assume the Bank pledges its 160
millions free gold with the Federal Reserve Agent instead of paving
it in order to reduce its liability.
The account will then stand ;
Reserve Bank
Federal Reserve Agent
Rediscounts Pledged 600 F, R,Notes 760 Rediscounts 600
__
Free
1601
Capital
400 Gold
F.R.Notes
Total
600
Gold
*
Pledged 160
Free
240
...
Total
400
F.R.Notes
16C
Total
H60
760
1160
760
760
Reserve
40$ of 760 = 304
Free gold, 40C-304 = 96
Credit power, F.R.Notes * 2~g X 96 = 240
By this process, under the amended lav, the pledge of 160 millions
gold, instead of."reducing" liability on 160 millions of Federal reserve
notes as was the case in II, steps 1 and 2, supra, has increased the lia
bility of the bank by the amount of additional Federal Reserve notes
taken out, - 160 millions,- and the bank, as also the Government, is
liable on the total,- 760 millions.
Note also that the bank has in
fact only 240 millions gold in its vaults and 160 pledged with the Fed
eral Reserve Agent. The amended law, however, provides that the 160
against Federal reserve notes
millions pledged with the Agent shall count as reserve/as if actually
held in the
bank’s vaults-,
The total gold in the bank’s vaults-
240 millions should, therefore, have added to it the amount pledged
with the Agent- 160 millions, making a total of 400 millions.
We saw above under II, step 1, supra, that a payment to the Agent
under the present law reduced the cash in the bank’s vault to 240 mil
lions while on the other hand the liability of the bank on Federal re
serve notes -was reduced to 440 millions.
631.
-32-
Under the amendment, however, th9 160 millions of gold pledged
with the Agent is still counted as bash in the bank’* vault3, while, on
the other hand> the 160 millions of additional Federal reserve notes
taken Out by the bank instead of reducing
its liability to 440 millions,
increases its liability on Federal reserve notes from 600 to
millions,
making it the same as the liability of the Government.
4.
We saw also under II, Step 2, supra, that the bank had 240
millions of gold in its vaults which it could not utilize for further
issues of Federal reserve notes as it had to serve as a 40$ gold reserve
against the 600 millions of Federal reserve notes outstanding upon which
the bank was liable.
This 240 millions, however, is not a trust fund
for, the redemption of the notes but merely a gold (cash) requirement.
Inasmuch as the amendment provides that this gold reserve
may be deposited with the Federal Reserve Agent and still be counted as
if in the bank vaults let us
suppose that the bank transfers i.e.
pledges this 240 millions of gold with the Federal Reserve Agent.
By
this transfer or pledge, what was reserve before now becomes part of the
Agent’s trust fund, but being gold, it also, under the amendment-, satis
fies the gold (cash) reserve requirement as if it still were in the bank’s
vaults.
After such transfer, the account would stand:
Reserve Bank
Re discount s: Pledge d
Free
Gold
-
Total
600
Pledged
Free
4 oo
Total
Uoo
F. R. Notes
Capital
1000
400
Rediscounts
Gold
600
400
F. R. Notes IOC '-
*
4 oo
2 , R. Notes
600
Federal Reserve Agent
Total
i 4 oo
1400
1000
1000
1108
-33-
Reserve:
d^a .
H(# of 1000 - Uoo
Free gold 400 - H00 =
0
Credit power, Federal Reserve Notes =
2|* x 0 = 0
In the above statement the gold in the bank vaults is entered
as U00 millions.
In fact there is not a dollar in gold in the vaults,
as it all has been pledged with the Federal Reserve Agent, but, under
the amendment it counts as reserve in the bank vaults.
V.
Let us now consider just how great an expansion of credit power
in the shape of Federal reserve notes has been made possible by the
provisions of the amendment that gold deposited with the Agent shall
count as reserve in the b-nk's vaults.
V,re here still assume that 600
millions represents the maximum of eligible paper the bank can secure.
We saw above under I that the bank had l60 millions in free
directly
gold bpt could not take out Federal reserve notes/against it because it
had no free discounts.
Under tho amendment, however, the Agent can issue Federal
reserve notes against the deposit of this gold.
We also saw in II, Stepsl and 2, that by paving this l60 millions
in gold to the Agent the bank received back l60 millions in commercial
paper and that this paper was redeposited with the Agent and l60 millions
additional notes taken out but that although the bank was liable on this
additional l60 millions, it had also, by the payment of 160 millions
i,reducedn its liability on notes to an equal amount, and that therefore,
the bank remained liable only on 600 millions, as before, while the
Government liability had increased to 7^0 millions.
We also saw under III that under the amendment, the bank could
pledge this 160 millions of gold with the Agent and thereby increase the
total note issue outstanding fron 600 to jSO
aillio$ upon which both
the bank and the Government were liable.
We also saw that under the amendment the bank could also pledge
its 2U0 millions of gold held as reserve against the 600 millions of out
34
standing Federal reserve notes, with the Agent.and take out 2U0 millions
of additional Federal reserve notes.
To find, therefore, the true measure of expansion under the
amdndment we must consider; (a) the effect of the payment of l6o mil
lions of gold to the Agent, under the present law, as compared with;
(b) the effect of the pledge with the Agent of l60 millions of gold under
the amendment, and (c) the effect of the further pledge of 2^0 millions
o| gold with the Agent.
We find that (a) increased the total note issue l60 millions
while (b) increased the total note issued by 160 millions, and (c) by
2 U0
millions, making a total of HOQ millions in all.
■631-
-35-
That is to say, the payment to the Agent left the hank under
the present law, with only 240 millions of gold which constituted its
gold reserve of 40$ against 600 millions of Federal reserve notes out
standing! while under the amendment, this
240 millions is actually de
posited with the Agent> authorizing the issue hy him of 240 millions
of additional Federal reserve notes, but the 240 millions , as also
the 160 millions above mentioned is counted a3 if still in the vaults
of the bank*
In the bank's vaults,this 160 1 240 ® 400 millions
stands as a reserve for 2f X 400 millions of Federal reserve notes,
while with the Agent it stands for the issue, dollar for dollar, of
400 millions Federal reserve -notes, while the 600 millions of com
mercial paper pledged with the Agent serves as collateral for 600
millions of Federal reserve notes.
The Agent then holds 100$ in collateral,- 600 millions in
commercial paper and 400 millions in gold, while the 400 millions of
gold,is counted as reserve in the bank's vaults, and serves as a gold
reserve for 2^ X 400 millions s 1000 millions in Federal reserve notes,the exact amount issued by the Federal Reserve Agent.
This shows that the real effect of the Amendment is to
consolidate, for Federal reserve note purposes, the gold held by the
bank with that held by the Agent, that is to say, the gold held by
the Agent serves as if actually held in the vaults of the bank.
Going back to II, Stop 2 , we see that after issuing
the maximum amount of notes possible under the present law, the ac
count of the bank and Federal Reserve Agent stand as followsiwwj/ 2
w.
%____________ Federal Reserve Agent
Rediscounts Pledged 60G F. R. Notes
600 Rediscounts 60C
"
Free
Capital
400 , Gold
160
"
Total
600
Sold Paid to F.R.Agt,&60)
" in vaults of Banks240
"
Total
240
F.R.Notes
160'
F.R,Notes 760
Total
1000
760 1
760
1000 r
Reserve
Bank_______
l
!
. 1111
— 3 6 —
631,
Reserve:
40$ of 600 s 340
Free gold = 240 - 240 r 0
Credit powers, F. R, notes •
x 0 » 0
The hank here has 240 millions of gold in its Vaults hut has
to retain it as a 40$ gold reserve upon the 600 millions of Federal re
serve notes outstanding,
This gold, however, is not a trust fund, it
is merely a cash reserve requirement.
The amendment provides that this gold reserve of 240 millions
may he deposited with the Reserve Agent and still count as reserve,
After depositing this 240 millions with the Agent, the account, as shown,
supra, under IV/ stood: -
Reserve Bank.
Federal Reserve Agent.
Rediscounts oledeed
600 F. R. Notes 1000
Re d is counts 600
.... "
free
Gold
400
Capital
400
_ "
Total
600
Gold nledeed with Acent 400
•L in vaults of Bank *(400)
Total
400
Federal Reserve Notes
400
P.R.Notes 100C
....
Total
1400
lood
iooc
1400
♦Held, as per amendment, with the Federal Reserve Agent.
Reserve:
40$ of 1000 • 400
Free gold = 400 - 400 : 0
Credit power - Federal Reserve Notes *
2% x 0 *, 0.
This shows at' a glance what the amendment accomplishes:
Under II, step 2, (present law) the hank paid 160 millions in
gold to the Agent which authorized the Agent to issue 160 millions in
Federal reserve notes in return for the unpledged discounts which the
payment of said 160 millions of gold released.
Similarly, under the amendment, the hank pledges this 160
millions for an equal amount of notes.
Under the amendment, the hank also pledges the 240 millions
of gold held hy the hank under II, step 2, present law, as a reserve
against the 600 millions of Federal reserve notes outstanding, and this
pledge with the Agent authorized him to issue 240 millions additional
of Federal reserve notes making a total of 1000 millions, as against
760 millions under the present law.
Under the amendment, however, the 600 millions of rediscounts
is pledged as part collateral,--*60$ for 1000 millions of Federal reserve notes,
instead of, as in II, Step 2 ,(present law),as 100$ collateral for 600 millions
of notes.
So also, the lf>0 millions paid to the Agent under II, Step 2 ,
(present law) remains with the Agent as part collateral for 1000 millions of
Federal reserve notes, instead of as 100$ collateral for l60 millions of notes.
So also the 2^0 millions of gold, which -was
tied up in the
hank's vaults as reserve under II, Step 2 ,(Present law), hut which, under the
amendment, is pledged with the Agent, stands as part collateral for 1000 mil
lions of Federal reserve notes.
Thus we see that the amendment has not changed the law as to
the requirement of 100$ collateral to he pledged with the Ageni, for we see
that the 1000 millions of Federalreserve notes issued hy the Agent are se
cured hy 100$, i.e. hy 600 millions of commercial paper, and 1+00 millions of
gold.
Nor has it changed the law that a reserve of 40$ in gold must he held
against outstanding Federal reserve notes, for the required reserve on 1000
millions of Federal reserve notes is U00 millions and we see that there are in
the Agent's possession 400 millions in gold which serves as the U0$ reserve,
as if actually in the hank's vaults.
What change, then has the amendment brought about ?
It has simply provided ; (a)
that the U0$ gold reserve, if
deposited with the Agent, may also count as part of the trust fund of 100$ which
the Agent must hold against all Federal reserve notes issued by him. (b)
that
instead of issuing notes only against commercial paper, the Agent may also issue
them against gold*
(c) that when the gold pledged for
notes amounts to U0$ of
the total issue, the gold may serve as the gold Eeserve, or pro tanto, which
the hank is required to keep, as.a cash requirement, in its vaults, against such
total issue, (d) that the gold reserve is not thus used at the same time for
two inconsistent purposes hut is used in the alternative for either of two pur
poses, olid, that its use for one releases it from the other.
It may be claimed that,hy the amendment the hank is permitted
to take out 1000 millions of Federal reserve notes without the necessity .
1118
-38-
631
of carrying ^0$ or ty)0 millions in gold*
This, however, is not truo in fact as the gold rosorvo of UOQ mil
lions is just as much a cash reserve when held by the Agont as when held
if
by the bank. What is true, however, is that/HOO millions of gold had boon
actually in the vaults of the bank, under the present law, the Agent would
have had to hold U00 millions of ccmnereial paper in addition.
The proposed amendment releases the Agont from the necessity of
carrying this 1+00 millions of commercial paper, by permitting the gold re
serve to be held by him in its place. It thus dispenses with the necessity
for using ^400 millions of commercial paper but as the bank is assumed to
have no commercial paper - other than the 600 millions already pledged with
the Agent- no commercial paper in fact has been released to it.
On the other hand, if the bank had an ample supply
of commercial
paper, the amendment would leave in the bank, unpledged, UOO millions of
could
commercial paper, but the total note is3uec
'./never exceed 2^ times the
amount of gold held by the bank, plus that pledged with the Agent.
That tho permission given by the amendment to count the gold
reserve against Federal cosorve notes, when deposited with the Agent as
part of the Agent’s trust fund, is just, equitable, and in consonance
with..sound banking will readily be seen if we consolidate tho accounts
of the bank and the Agont, as is really accomplished, at least for Federal
reserve note purposes, by the amendment.
The account would then 3tand as follows!
5.
Consolidated account of Bank and Federal Reserve Agent.
Rediscounts
Gold
Federal Reserve Notes
Total
Reserve:
600
400
400
1400
Federal Reserve Notes
Capital
1000
400
1
1400
*
40# of 1000 c 400
Free gold s 400 - 400 » 0
Credit power, Federal reserve notes * 0.
The above shows conclusively that, under the amendment, - (a) the
j4gent may issue notes based upon commercial paper or gold; (b) the total
jnotes outstanding can never exceed 2^ times the gold in the trust fund, serv-.
ing also as a 40$ gold reserve, as if in the bank’s vaults;
(c) the notes
631
-39
issued can never exceed 100f» of the total collateral, *■ commercial
paper and gold - held by the Agent.
VI.
Finally, it may be claimed that, assuming that the
Amendment is correct
work out
in theory,yet in practice it would not
successfully, for the reason that the bank,-as shown
in the statement of account under IV, supra,-is including the
gold, -
amounting to 400 millions, - deposited with the Agent
as part of his trust fund, also as a reserve as if in the bank
vaults, whereas it is not in the bank vaults, and the bank has
no control over it, and, as a result, if the outstanding 1000
millions of Federal reserve notes, or any portion of them, were
presented to the bank for redemption, it would have no gold ac
tually in its vaults as reserve for such payment.
The answer to this objection is that although the bank
does not hold this 400 millions of reserve actually in its vaults,
yet it has an immediate right to its possession, which is as good
as if it were in its own vaults.
1115
- U 0 -
^31-
In this connection it must be remembered that although Federal
reserve notes are an obligation both of the Government and of the banks,
and must be redeemed by either, the demand for redemption
upon one or the other and not upon both.
must be made
In other -words, the holder of
the note on which Mo d d s i r e s redemption must elect whether to present
it to the Government or to the bank through which it was issued*
If for example, the holder presents it to the Government, the
latter must redeem it and.towards this redemption, it has the gold de
posited with the Federal Reserve Agent and with the Treasurer, that
is the Government has U0$ in gold and must pay also the remaining 60$
which, later, the bank must repay to it.
If, on the other hand, the holder elects to
from the bank, the latter by paying the not6
demand redemption
in full and surrendering
it to the Federal Reserve Agent will receive back the
gold reserve,
leaving its net payment from funds in its vaults, 60$.
Thus in either event, the 40$ gold reserve is available to
the Government or to the bank, - whichever is called upon to redeem
the note; and in either event the bank must pay 60$ of the amount of
the note from its cash resources in its vaults and can obtain the
40$ gold reserve for the balance.
The only distinction is that if the holder demands redemption
from the bank the 60$ aforesaid is paid by the bank to the holder;
while if the holder demands redemption from the Government, the 60$
aforesaid is paid by the bank to the Government.
1116
To sum up j
1.
The Federal Reserve Bank, in its illustration given .
above, by paving the l60 millions of free gold,under the present law, to
the Agent, can issue 160 millions additional notes upon which the Govern
ment is liable but upon which its liability is "reduced”.
2.
The bank by pledging this 160 millions of free gold, under the
amendment, with the Federal Reserve Agent, can take out 160 millions ad
ditional notes, upon.which it, as well as the Government i3 liable.
' 3.
The bank, by pledging the 2^0 millions of gold held, under the
present law, in its vaults, as a 40$ reserve against the 600 millions of
Federal reserve notes outstanding, of which the collateral i3 commercial
paper, can take out 2H0 millions more of notes, as this 2U0 millions of gold
will count both as reserve and also collateral for all notes outstanding,
thus displacing the necessity
for ^00 millions of commercial paper being
held by the Agent.
4.
The same amount of reserve must be held under the amendment
as under the present law, but it may be kept with the Agent and count as
part of the 100$ collateral behind the notes.
5*
All notes issued must be covered by collateral with the Agent
of 100$ in commercial paper, gold or in part,of cash.
The real effect of the amendment, therefore is that, whereas
under the present law, when the collateral is 100$ commercial paper, a U0$
gold r eserve must be kept by the bank, under the proposed amendment if
e. g* U0$ of the collateral is held in gold by the Agent this will dispense
with the necessity :ior a gold reserve in the bank's vaults.
The effect of the present law, in other words, is to impound
in the shape of reserve and collateral, 1^0$ of the value of all notes issued,
whereas the proposed amendment dispenses wdth the extra U0$ collateral in
the shape of commercial paper, where' at least U0$ of the collateral con
sists of gold.
V'
. 1117
63^
*»U2—
This will appear clearly if we were to assume that the lawwere changed so that the office of Federal Reserve Agent were abolished
and the accounts of the Agent and the bank were consolidated as in the
above illustration* and that the law further provided that the bank could
issue Federal reserve notes* provided* it kept in its vaults* as a trust
fund for the redemption of the notes* 60$ in comnercial paper and
in
gold.
It is clear* in the above case* that the requirement of a
kcrfo
cash (gold) reserve against Federal reserve notes would be satisfied if
the bank held
the r_esult
in gold segregated as a trust fund.
This is in effect*
reached by the proposed amendment* the office of Federal Re
serve Agent being retained* but the accounts of the bank- at least for
Federal reserve note purposes,- being consolidated with the accounts of
the Agent*
It i3 submitted that* for the reasons set forth in detail
above* the proposed amendment should be enacted into law.
Under the law
so amended, the Federal reserve banks will be able to conserve gold already
in their possession* to secure gold now held by the member banks* e-*"
finally* to initiate and maintain an effective and greatly needed National
policy of gold conservation.
The writor desires to acknowledge tho invaluable assistance
rendered in the preparation of this memorandum by Federal Reserve Agent
Jay* Mr. Harrison* Mr* Foulk* Mr. Gidney and Mr. Jacobson*
633
STATEMENT FOR THE PRESS i
WashingtonApril 29, 1916.
The Federal Reserve Board mailed this morning to the Federal
reserve banks for distribution to all their member banks its circular
announcing a plan for country-wide check clearing and collection* The
salient points of the circular are:
The Federal Reserve Board, acting under the authority of the
Federal Reserve Act, has designated the Federal Reserve Banks to act
as clearing houses for the clearing and collection of checks for their
members. In doing this the Federal Reserve Board has laid down certain
general principles but has left it for the executive officers of the
Federal Reserve Banks to work out the details. The Board evidently
recognizes the immense amount o£ detail work that must be done in order
to put such a vast machinery into smooth operation, and has set the time
for beginning the operation of the system as June 15th.
The important
features of the plan are:
(1) The Federal Reserve Banks will accept at par all checks
from member banks, whether drawn against other member banks,
non-member banks, or private banks.
An exception is made at
the outset in the case of checks drawn against non-member banks
which can not be collected at par,
(2) All checks thus received from member banks will be given
immediate credit entry, although amounts thus credited will not
be counted as reserves, nor become available until collected.
(3 ) In order to enable member banks to know how soon checks
sent in for collection will be available either as reserves or
for payment of checks drawn against them, time schedules, giving
the minimum time for collection, will be furnished by each Fed
eral Reserve Bank to its member banks.
(4) The actual cost, without profit, of the clearing and col
lection of checks will be paid by the Federal Reserve Banks and
assessed against the member banks in proportion to their send
ings .
(5) The whole plan is based on generally accepted principles
under which clearing and collection plans have long been oper
ated.
A Federal Reserve Bank will not debit a member bank's
reserve account with items forwarded to it for collection until
the remittance of the member bank, in payment of such
items
shall have had time to reach the Federal Reserve Bank.
J
http://fraser.stlouisfed.org/
I*r
Federal Reserve Bank of St. Louis
W. P. G. HARDING, GoverNORF*
PAUL m . WARBURG. Vice Governor
FREDERIC A. DELANO
ADOLPH C. MILLER
CHARLES S. HAMLIN
Ex -O fficio m em bers
WILLIAM G. MCADOC
SECRETARY OF THE TREASURY
CHAIRMAN
JOHN SKELTON WILLIAMS
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
H. PARKER WILLIS, SECRETARY
SHERMAN P. ALLEN. ASST. SECRETARY
AND FISCAL AGENT
WASHINGTON
ADDRESS REPLY TO
*t 6 3 eW tL RESERVE BOARD
April 29, 1916.
S I R :
Referring to our conference and correspondence on the sub
ject of check clearing and collection, I have sent you this morning
telegram reading as follows :
M Clearing circulars are being forwarded
to you this forenoon in sufficient quantity
to enable you to forward one to each of your
member banks. The circulars bear date of May
first and we trust will be forwarded with as
little loss of time as possible. "
Furthermore, I am enclosing, herewith, on behalf of the
Federal Reserve Board, copy of the circular sent to you and also
copy of the press statement which the Board gave out today. While
it may be too much to expect that the Federal Reserve Banks will
bo ready on June 15th, it is the hope of the Board that the banks
wdLl diligently and energetically take hold of this matter and,
through conferences with their member banks and with other Federal
Reserve Bank officers, prepare the necessary circulars, instruc
tions and forms.
The Board's circular, as sent out, embodies many of the
criticisms and suggestions that have come to the Board and we
believe will prove satisfactory.
Respectfully,
Vice Governor
.1
W. P. G . HARDING, GOVERNOR
PAUL M. WARBURG, VICE GOVERNOR
FREDERIC A. DELANO
ADOLPH C. MILLER
CHARLES S. HAMLIN
EX-OFFICIO MEMBERS
WfLLIAM G. McADOC
SECRETARY OF THE TREASURY
CHAIRMAN
JOHN SKELTON WILLIAMS
FEDERAL RESERVE BOARD
COMPTROLLER OF THE CURRENCY
W A S H IN G T O N
H. PARKER WILLIS, SECRETARY
SHERMAN P. ALLEN, ASST. SECRETARY
AND FISCAL AGENT
ADDRESS REPLY TO
^ ly g E R A L RESERVE BOARD
May 1,1916
My dear Mr.
May I ask you to tell me for the information of the Board, the extent to which you have access to examiners* re
ports of National hanks in your district ?
It i3 assumed
that you now have a complete file of all "condition reports"
of hanks in your district for the year and a half since your
hank was opened, - say nine reports - and that you also have
a list of all hanks that are on schedule for special examina
tion, and, in addition to that, at least an abstract by the
examiner
of his reports to the Comptroller of the Currency.
To summarize, the Board wishes to know to what ex
tent you feci that you have complete and accurate knowledge
of the condition of your member banks, and whether or not
you are in a position to decide quickly if you can safely
make advances to them on eligible collateral.
If you have
difficulties in procuring necessary information from the
Chief Examiner of your district, please explain what those
difficulties are.
Yours very truly,
Vice Governor.
637
a
p r o g n o s t i c a t i o n
One feature of the general question of the clearing and col
lection of checks is worth pointing out because it has not been re
ferred to by writers on the subject,, and that is the strengthening of
the bonds uniting the Federal reserve banks and their members which
this action by the Board will accomplish. Until now the only member
banks having direct communication with the reserve banks were those
having occasion to rediscount their paper. This represented in some
districts less than ten per cent of the member banks; in none more
than one~third. The great majority of member banks have regarded the
Federal reserve banks as an emergency provision for which they were pay
ing rather dear. The Board's action in designating the reserve banks
to act as clearing houses for their own member banks at once establish
es a new and far-reaching relationship. Not only will the Federal re
serve banks put themselves in a position to render a service to their
members which only the largest banks in New York, Chicago and St.Louis
have been able to render heretofore, but it seems entirely probable
that on a bare cost basis this service will be rendered for less than
it ever was before. But in order to protect themselves against the
sendings of other banks, each member bank will find it advantageous
to send items to its Federal reserve bank sufficient to offset items com
ing against it, and if unable to meet the flow of items against it,
will find it advantageous to increase its book balances in the Feder
al reserve bank, which may be done by remittances, but more naturally
as time goes on by discounting short-time paper with the reserve bank.
By these features of the check clearing and collection plan
the relations of the Federal reserve bank with its members will neces
sarily become more intimate, and if, as it is fair to assume, the of
ficers of the reserve banks treat their members with the same suavity
and sagacity that the officers of large reserve city banks now treat
their customer banks, there can be no doubt as to the outcome. Further
more, while this service is to be rendered to the member banks at cost,
without profit, the rediscounting of paper to create excess balances
will necessarily yield a profit to the Federal reserve bank and so help
that bank in a normal and natural way to earn dividends for its members.
It has been pointed out that the Federal reserve banks exist chiefly
to extend credit to their members through the rediscounting privilege,
but it is not to be supposed that this credit is to take the form sole
ly, nor even chiefly, of note issues; the more common form will un
doubtedly be, as time goes on, book credits subject to draft.
When this clearing plan 3 hall have been put into operation
we shall hear less of the Federal reserve banks acting as emergency
institutions; less of their being costly instruments for insurance.
Then it will be appreciated that they exist to render a valuable serv
ice to their members, every day in the week, every week in the month,
every month in the yearl
F. A. DELANO.
May 1, 1916,
1122
.638
CONDENSED SUMMARY OF THE MEMORANDUM OF
CHARLES S. HAMLIN, DATED MAY 1st,
SO FAR AS RELATES TO PROPOSED AMENDMENTS TO SECTION 16,
OF THE FEDERAL RESERVE ACT,
1.
It is necessary carefully to distinguish between: A.
The issue of Federal reserve notes.by. the Federal Reserve
Agent to. a Federal reserve bank.
B.
The paying out of such notes by the Federal reserve bank
into circulation.
2.
The present law requires: For A, - the pledge with the Agent of 1C0$ in commercial paper.
For B, - the impounding in the bank vaults of 40$ gold reserve,
3.
The proposed amendment permits: As to A, - the pledge with the Agent of gold as well as commercial
paper.
As to B, - the pledge with the Agent of the 40$ reserve fund.
4.
The proposed amendment also provides that the 40$ gold reserve, when
pledged with the Agent, shall count as part of the 100$ col-r
lateral which the Agent must have as security for all outstand
ing Federal, reserve notes, and that it shall be counted, as if
it were in the bank vaults, as tho gold reserve of 40$ required
to be impounded in the bank*s vaults.
5.
The effect of the amendment is: -
A.
Where the bank has an ample supply of commercial paper.
It permits the same issue of Federal reserve notes as
under the present law, but releases commercial paper &a
collateral by the exact amount of gold deposited with
the Agent.
B.
When the bank can secure only a limited amount of com
mercial paper.*
It permits the bank to issue a larger amount of Federal,
reserve notes by the exact amount, dollar for dollar, of
gold deposited in liou of cornnercial paper.
1123
- 2 -
638.
In both A and 9, however, the total notes outstanding
can never exceed 8^ times the amount of gold held by
the bank, whether deposited, as in A, in the bank vaults,
or deposited, as in B, with the Federal Reserve Agent,
In both A and B, also, the total notes outstanding can
never exceed the amount of collateral, whether commercial
paper or gold, pledged with the Agent.
6.
Under the present law, if the bank has 2f times as much commercial
paper as it has free gold in its vaults it can take out as
many notes as it could under the amended law, and no special
benefit would be derived by the amendment, except that it
would permit banks to conserve their gold by taking out Fed
eral reserve notes, dollar for dollar, in its place.
7.
If, however, the Federal reserve bank can not secure si x as much
commercial paper as it has gold, some of its gold can not be
utilized in the shape of Federal reserve notes for lack of
commercial paper to pledge with the Agent, and the amendment
permits the lack of commercial paper to be made up by the
pledge of gold in its place, and thus enables all of the gold
owned by the bank to be utilized by the issue of Federal re
serve notes.
8.
The amendment thus permits an additional issue of notes, dollar
for dollar, by the amount of gold deposited by the bank with*
the Agent, but the total issue can never be (a) more then
x the gold held in the bank's vaults (excluding that
2j
held
as reserve against deposits,) plus the gold pledged with the
Agent; (b) more than 100$ of the total collateral, paper and:
gold held by the Agent.
9.
Thus the amendment operates to reduce the gold and paper required
to be impounded from a minimum of 140$ (40$ reserve plus 100$
comnercial paper) under the present law, to a minimum of 100$
(40$ reserve and 60$ comnercial paper) under the amendment.
1124
_ 3 -
10.
638.
The 40$ gold reserve, under the present law, when held in the
bank's vaults servos as a reserve for 2 ar x that amount of
notes covered by
2% x the same amount of commercial paper;
when, however, this reserve, when available a3 a basis for
further note issues* is deposited with the Agent, .under the
amendment, it serves as part collaterali dollar for dollar,
for all outstanding Federal reserve notes, and also as the
required cash (gold) reserve11.
The amendment is, in effect, a legal recognition of the fact that
the 40$ cash (gold) reserve requirement when kept in the
bank's vaults is not a trust fund, but merely, a cash (gold)
requirement; when, however, this cash (gold) reserve is
pledged with the Federal Reserve Agent, it becomes a part
of his collateral, that is to say, a part of his trust fund.,
12.
The .amendment, therofore, provides that where 40$ of the Agent's
.*
trust fund consists of cash (gold).*
*
-
^
- 1
be held to satisfy the requirement of a 40$ cash (gold) reserve.
13.
The amendment, while permitting an increase o f notes to the ex
tent that gold is permitted to serve as collateral, produces
no inflation, for the reason that all notes issued are
covered by 100$, either in commercial paper or gold, or
-
• both, as a trust fund.
14.
As a matter of fact, a contraction necessarily results from the
substitution of Federal reserve notes for the outstanding
National bank notes, both under the present law and under
the amendment, bocause of the 40$ gold reserve required for
Federal reserve, notes as compared with only a 5$ reserve for
National Bank notes.
If such substitution could immediately
*\
take place it would more than absorb the 250 millions of net
imports of gold into the*United States since January 1 ,. 1914„
15.
The amendment is predicated upon'two principles;
0
(a)
That., if
1125
638
- 4
Federal reserve notea can be safely issued by the Government
against the pledge of 100$ of eoraBercial paper, it does not
impair their safety if they can be issued against 60$ com
mercial paper and 40$ gold/ or against 100$ of gold; (b) That
the cash (gold) reserve requirement is satisfied by permit
ting it to be deposited with the Agent and thus constitute a
part of his trust fund.
16.
Assuming that the Federal reasrve banks must keep a 40$ gold re
serve, it makes no difference whether it is kept in the
bank’s vaults or with the Federal Reserve Agent, for, as
shown in the memorandum, it is as instantly available to
\
the reserve bank in the latter case as in the former.
17.
The real effect of the amendment is, therefore, to prevent un
4
necessary duplication of collateral whether considered as
reserve or as a trust fund, recognizing that, if in the
shape of gold, it is as available for reserve as for col
lateral, or as available for collateral as for reserve. It
can never be actually used for both purposes at the same
time,
Its service is an alternative one, and its use for
either purpose discharges it from liability for the other,
18.
Concrete results of the amendment as to note issuing power.
A
Present Law
Assume that the bank holds 400 millions of free gold which, for
convenience, we will call capital.
Under the present law it can not directly take out Federal re
serve notes against this gold unless it has
2% times this
amount in paper.
This is to say, while 400 millions of gold held as reserve in the
bank’s vaults would sustain am issue of 2a- times 400 millions
in notes, i. e., 1000 millions, yet notes to that amount could
not be taken out except by the pledge of 1000 millions of paper.
638.
o38.
. 5 r
Only, therefore, in the event that it could radiscouni 1000 millions
of paper for member banks, could it use its 400 millions of
gold as a reserve for 100 C
millions of Federal reserve notes.
B
If the member banks, instead of offering 1000 millions of paper
for rediscount, should offer 1000 millions of gold as an ex
cess deposit provided the Reserve banks gave 'them Federal re
serve notes, the Reserve banks could not accept the gold for,
although such deposit would give them a total of 1400 mil
lions in gold, not a single Federal reserve nets could be
taken out from the Agent by depositing it, or any part of it.
Amended Law
Under the amendment, however, the banks in A could take out 400
millions in Federal reserve notes by depositing with the Agent
400 millions in goldj and in B they could take out 1400 mil
lions in Federal reserve notes, paying 1000 millions to the
member banks, and retaining 400 millions in their cash, thu
conserving 1400 millions in all of gold,
D
Let us suppose that in A above, the Reserve banks can not secure
2t times as much paper as they have in free gold, but can
secure,
e. g., only 600 millions.
In such a case, under
the present law the banks could take out only 600 millions
of Federal reserve bates directly against the pledge of 600
millions of
paper.
This would leave the bank with its 400 millions of gold, of which
240 millions is held as reserve for the 600 millions ox Fedora!
- 6 r>:
reserve notes already taken out, and 160 millions would
remain free in its vaults, not capable of being used for
further Federal reserve note issues because of lack of com
mercial paper to pledge
for them.
E
The bank could, however, - under the circuitous process permitted
by the.prassnt law, - pay this 160 millions of free gold to
the Agent, taking down 160 millions of paper, and then by
repledging the paper obtain 160 millions of additional notes,
making the total outstanding notes
760 millions.
F
The maximum note issuing power, therefore, under the present law,
assuming 400 millions of free gold and 600 millions of paper, is 760 millions.
G
Under the amendment, however, the bank could not only pledge the
160 millions referred to above in E with the Agent, thus
receiving 160 millions in notes, but it could also pledge
with the Agent the 240 millions of gold held in its vaults
as a reserve against the 600 millions of Federal reserve
notes secured by pledged commercial paper, and by thus pledg
ing this 240 millions of gold, could take out 240 millions
additional of Federal reserve notes.
The total notes which could be taken out under the amended law,
%
is therefore, 1000 millions.
The Agent would then hold as
collateral 600 millions of paper and 400 millions of gold, 4. e., 10 0 $ of all notes issued by him.
The required reserve of 1000 millions of notes is 400 millions.
Inasmuch as the Agent hold3 400 millions of gold this, under
the amendment, satisfies the cash (gold) reserve requirement.
'- 7 -
D
*
638.
H
la conclusion: **■
1.
.
Under the present law, the reserve hanks can only utilize their
free vault gold as a reserve against 2# tiroes that amount in
notes assured by
2,
zh times that amount of commercial paper,
Any excess of gold, in their vaults over what
is used as reserves,
as in A, supra, must lie idle so far as Federal reserve note
issues are concerned,
3,
Under the circuitous method permitted under the present law, how
ever, this excess gold can be used, dollar for dollar, for
new issues of Federal reserve notes,
4.
Under the amendment, the gold used as a reserve under A, supra,
can also be used, by pledging it with the Agent as part col
*
lateral, thus permitting the issue of additional notes in
amount equal to the gold thus pledged, that is, dollar for
dollar; Provided, however, that the total notes Issued by
the Agent can never exceed the amount of the collateral, whether paper, gold, or both, - pledged.
6.
The 40$ gold reserve requirement is satisfied provided the col
lateral held by the'Agent consists of gold to the amount of
40$ of the total notes outstanding.
5/5/16.
^
,f
n o
W. P . G . HARDING, GOVERNOR
PAUL M. WARBURG, VICE GOVERNOR
FREDERIC A. DELANO
ADOLPH C. MILLER
CHARLES S. HAMLIN
Ex-O fficio Members
WILLIAM G. MCADOC
SECRETARY OF THE TREASURY
C h a ir m a n
JOHN SKELTON WILLIAMS
FEDERAL RESERVE BOARD
COMPTROLLER OF THE CURRENCY
H . P A R K E RR W I L L I S , SECRETARY
S H E R M A N P . A L L E N . ASST. SECRETARY
AND FISCAL AGENT
WASHINGTON
AD D R E SS R E P L Y TO
FEDERAL RESERVE BOARD
May 3, 1916.
Federal Reserve Bank,
G-entlemen:
In connection with the release of United States bonds
securing circulation, and similar transactions, it has occasionally
happened that a Federal reserve bank desiring to deposit with the
Treasurer of the United States an amount not an even multiple of
$10,000 has made an independent shipment of currency to the Treas
urer for the odd amount, at the same time requesting the Federal
Reserve Board to make deposit of the balance
in the nearest
multiple of $10,000.
Some banks, however, have adopted the practice of re
questing the Board to make deposit of the exact amount required for
the purpose of bond release, and for credit in the Gold Redemption
Fund against Federal reserve notes, such additional amount as would
bring the total deposit up to an even multiple of $10,000.
This
method has proved entirely satisfactory.
We bring this matter to your attention for such assistance
as it may give in handling deposits of odd amounts, in case you
are not already following this method.
Respectfully,
Assistant Secretary.
0
Ex -O ffic io Members
CHARLES S. HAM LIN, GOVERNOR
FREDERIC A. DELANO, VICE GOVERNOR
PA U L M .WARBURG
W. P. G. HARDING
ADOLPH C. M ILLER
W ILLIAM 6 . McADOO
S ecretary of the Treasu ry
CHAIRMAN
JOHN SKELTON W ILLIAM S
Co m p t r o l l e r o f t h e Cu r r e n c y
FEDERAL RESERVE BOARD
H . PARKER W IL L IS , SECRETARY
S H E R M AN 'P^ALLE N , ASST. SECRETARY
ADDRESS REPLY TO
W ASHING TON
FEDERAL RESERVE BOARD
May 3, 1916.
To State Member Banks:
The Federal Reserve Board and the Comptroller of the Currency
have agreed upon and now promulgate the following rules in regard to the
periodical Reports of Condition which the State member banks of the Fed
eral Reserve System are required to render under the provisions of the
Federal Reserve Act:
1.
WHEN THE REPORTS OF CONDITION MADE TO THE STATE BANKING DEPART
MENTS ARE RENDERED AS OF THE SAME DATE AS REQUIRED BY THE COMPTROLLER
OF THE CURRENCY FOR NATIONAL BANKS:
N
(a) The Comptroller of the Currency will accept the reports so
rendered by the State banks, on the same forms used in
reporting to the State Banking Departments.
(b) The publication of reports will be accepted by the Comptroller
of the Currency on the publication form rendered to State
Banking Departments. provided, the office of the Comptrol
ler of the Currency is furnished with proof of publication
in the manner required of National Banks.
(c) State member banks will be furthermore required to furnish the
Office of the Comptroller of the Currency, for abstracting
purposes only, a statement of Resources and Liabilities on
the form prescribed by the office of the Comptroller of the
Currency for National Banks. This statement must be signed
by the President or Cashier of the reporting bank and
acknowledged before a notary public.
2.
WHEN REPORTS TO STATE BANKING DEPARTMENTS ARE NOT REQUIRED TO
BE RENDERED ON THE SAME DATE AS REPORTS CALLED FOR BY THE COMPTROLLER
OF THE CURRENCY FROM NATIONAL BANKS:
(a) State member banks will be required to execute their reports on
the same form prescribed by the Comptroller of the Currency
for National Banks, but omitting from their report blank,
if they so desire, all schedules except that relating to
coin and coin certificates,
(b)
They will also be required to conform to the regulations govern
ing National Banks in the matter of publication of reports
and the furnishing of proof of such publication.
V
-2-
640.
These rules may be revised or revoked on 30 days’ notice
from the Federal Reserve Board or the Comptroller of the Currency,
CHARLES S. HAMLIN, ^
Governor, Federal Reserve Board
JOHN SKELTON WILLIAMS,
Comptroller of the Currency,
SHERMAN ALLEN,
Assistant Secretary
64a
May 5, 1916.
STATEMENT BY MR* WARBURG:
Secretax^r M c A cloo, the Chairman of our delegation, has
nade a very complete statement concerning the work done by the con
ference
same.
at Buence Aires, and X do not see what I could add to the
In an address which I made at Buenos Aires I said that the
American delegates considered themselves as "exchange professors",
and that, while we nad come to contribute our own share m
imparting
knowledge and fact3 peculiar to our own country, wo realized a t (the
same time that we might render a greater service by employing tho
time spent in foreign countries m
take h^rna to our own country m
absorbing knowledge which we would
order to make it available to our
people.
This does net apply to our own delegation only, but
with equal force to those of all South and Central American nations.
There is no doubt that more Argentinos have crossed the Atlantic than
the Andes, and between the majority of the Latin American sister re
publics there is hardly any commercial or intellectual intercourse.
These conferences are, therefore, productive of the greatest good
in promoting mutual understanding among American nations and in devel
oping the consciousness of our common interests and ideas,
.
If by my own impressions I may judge the effect that
this conference must have produced on the delegates of all nations,
if they learned as much about how
" the other man lives " as I
learned about them, I could only wish that the " Tennessee" might
have carried a thousand delegates instead of seven.
1132
643
-3~
Now that we have returned homo it will be tho duty
of
us seyen to make
over impress ions available to our country.
Unfortunately, however, no matter how hard we may try, a good
.deal of the intensity of our impressions will1bo lost in trans
mission,
After w o rapid a visit it will indeod be a difficult
undertaking to reproduce the impressions that wc havo received
concerning the physical and economic conditions of the various
countries, but it will be quite impossible r. task to attempt to
reproduco tho improssions made upon us-by some of the eminent men
we mot, who won our esteem, friendship and admiration.Some of the countries through which we passed have
difficult problems to face, duo to or accentuated by the European
upheaval, but h^rd times will provo useful taskmasters, and in
some countries we found that difficult problems had produced strong
men whose sincerity and ability could not but inspire a confident
reliance that their country's fate was in good hands and ultimately
would be-worked out successfully.
Almost all of these countries offer wonderful possibi
lities, and for us who have gained so much through Europe•& losses,
it is not only a tempting opportunity, but also a serious obligation
placed upon U3 by Destiny - to lend a helping hand to our Latin
American sister republics in developing their marvelous resources,
and with that their own financial and political independence.
I was delighted to see strong evidence of the awak
ening of the American spirit of enterprise in almost all the coun
tries through which we passed ;
oping of ore lands in Brazil ,
be it in railroading and devel
or packing houses in Uruguay
1133
1134
-
SU2
3-
and Argentine - where tho opening of thoue plants has brought
about a great m c r o p s e 1.1 th
p n e ^ secured. by tho cattle rais
ers of those countries - or be it m
or raising sugar
-r tobacco m
mining in Chile and
Cuba*
It was a great satisfaction for me to notice in those
countries the beneficent effect of our n«/v banking legislation.
It did my hoart good to see American banks operating in these
foreign citio3, and to find that the American banker*s accoptanco at last haa become an integral part of the world*3 banking
machinery.
Much remains, however, xo be done m
t m s respect.
A world markot for tr-ese acceptances has been picvidod, but too
many American importers appear to be bight asl9op and do not
yet realize That it is poor business for thon to pay a British
banker an acceptance commission and a discount rate of abojt
five per cent, when by arranging for American bankors* credit
they can secure a discount raxo of but two per cent.
Tvhen passing through the Panama Canal, I had the great
honor of meeting General Gocthals, and I said to him that sha.cing hand3 with
n*» gavo me a peculiar thrill, because I felt
that the Panama Canal and tho Federal Reserve Act were the two
moit constructive contributions made
our generation-
or the United States in
The Panama C«rnal and tho Fecsral Reserve Act
have blasted tho \/ay wide open for the development of North.
American enterprise, but the businos- that is to floif through
these channels must now be developed by the individual initiative
of the people of the United States.
1135
-UHowever, if wo aro to socuro our position m
6te
tho
worlds all legislative obstructions that still stand in tho
way of a froo unfolding of our economic powers must be removed,
and I sincerely hope that Congress vail not delay the passing
of such amendments to tho Federal Reoorvo Act as are necessary
in nrder to place our banks on a par with the important Europoan banking institutions m t h which they have to compete m
foreign countries.
Only tho3j who with thoir own eyoa have
seon actual conditions can roalize the importance of securing
those changes and of securing thorn promptly.
May 5 * 1916
645
A
BILL
To amend the Act approved December twenty-third, nineteen
hundred and thirteen, known as the Federal Reserve Act,
BE IT ENACTED BY THE SENATE AND HOUSE OF REPRESENTATIVES
OF THE' UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED, That section
twenty-five of the Act approved December twenty-third, nineteen hun
dred and thirteen, known as the Federal Reserve Act, be amended to
read as follows:
Sec. 25. Any national banking association possessing a
capital and surplus of $1,000,000 or more may file application with
the Federal Reserve Board, for
permission to exercise upon such
conditions and under such regulations as may be prescribed by the
said board, either or both of the following powers!
First.
To establish branches in foreign countries or depen
dencies or insular possessions of the United States for the fur
therance of the foreign commerce of the United States, and to
act if required to do so as fiscal agents of the Unites States.
in the aggregate
Second. To invest an amount not exceeding/ten per centum
of its paid-in capital stock and surplus in the stock of one or
more banks or corporations chartered or incorporated under the
laws of the United States or of any State thereof, and princi
pally engaged in international or foreign banking, or banking
in a dependency or insular possession of the United States either
directly or through the agBncy,
ownership,
or control
±1 3 ?
-2 -
6H5
of local institutions in foreign countries, or in such dependoncios or insular possessions*
Such application shall specify the name and capital of
the banking association filing it, the powers applied for, and
the place or places where the banking operations proposed are
to be carried on.
Tho Federal Reserve Board shall have power
to approve or to reject such application in whole or in part if
for any reason the granting of such application is doomed inex
pedient, and shc.ll also have power from tine to timo to increase
or decrease the number of places where such banking operations
may be carried on.
Every national banking association operating foreign
branches shall be required to furnish information concerning the
condition of such branches to the Comptroller of the Currency
upon demand, and every member bank investing in the capital stock
of banks or corporations described under sub-paragraph Second
of the first paragraph of this Section shall be required to fur
nish information concerning the condition of such banks or cor
porations to the Federal Reserve Board upon demand, and the Fed
eral Reserve Board may order special examinations of the said
branches, banks, or corporations at such timo or tines as it •
may deem best.
Before any national bank shall be permitted to purchase
stock in any such corporation, the said corporation shall enter
-3-
6U5
into an agreement or undertaking with the Federal Reserve Board
to restrict its operations or conduct its business in such manner
or tinder such limitations and restrictions as the said board nay
prescribe for the place or places wherein such business is to bo
conducted*
If at any time the Federal Reserve Board shall as
certain that the regulations proscribed by it are not being com
plied with* said board shall be authorised and shall have power
to institute an investigation of the matter and to send for per
sons and papers, subpoena witnesses and adninistor oaths, in
order to satisfy itself as to the actual nature of the trans
actions referred to.
Should such investigation result in estab
lishing tho failure of the corporation in question, or of the
national bank or banks which may be stockholders therein, to
comply with the regulations laid down by the said Federal Reserve
Board, such national banks may be required to dispose of stock
holdings in the said corporation upon thirty days1 notice, and
in the event of their noncompliance with such order the Federal
Reserve Board may direct tho Comptrolis r of the Currency to in
stitute proceedings for forfeiture of charter.
Every such national banking association shall conduct
tho accounts of each foreign branch independently of tho accounts
of other foreign branches established by it and of its hone
office, and shall at the end of each fiscal period transfer to its
general lodger tho profit or loss accruing at ee.ch branch as
a separate item
1139
--4-
6U5
Any director or other officer,, agent or onployoo
of any member hank, nay with the approval of tho Federal Roserve Board, ho a director or other officer, agent, or onployse of any such hank or corporation above nontioned, in
the capital stock of which such monte r hank shall have in
vested as hereinbefore provided, without being subject to
tho provisions of Section 8 of tho Act approved October 15,
19lU, entitled "An Act to supplement existing laws against
unlawful restraints and monopolies, and for other purposes."
5/9/16
646.
Washington, D. C., May 10, 1916.
COMMENTS ON GOVERNOR HAMLIN’S BRIEF ON THE
UOTE ISSUE AMENDMENTS. •
This is a very able, thorough and painstaking document
and I would not like to have anything I say appear to show any lack
of appreciation of it.
I believe, however, that.it is based upon
some misconceptions which should be pointed out.
*
(1)
I think there is a confusion of ideas as to the relations
of two things which are not similar, but totally dissimilar; that is
to say, there is a confusion between the "collateral security" for a
credit given, and loan made, whether that loan be in the form of a
deposit or in the form of a payment of currency, or issue of bank notes,
on the one hand and the reserve which a bank is required by law to
retain against either deposits or note issues on the other.
(2) Governor Hamlin’s brief states in a good many different
ways that the only gain in the 40 - 60 proposition is in the release
of 40$ of paper for use as collateral.
He admits that just as much
gold is used for note issues under the old plan and could be under the
proposed plan; hence, that with a given amount of gold we can issue
no more notes under the new plan than under the old.
What he points
out very clearly is that a bank with a limited supply of eligible
paper could issue a good many more notes with a given supply of gold
under the new plan than under the old.
I believe Governor Hamlin is
entirely right in this contention and it leads me to make inquiries
regarding two things:
sue
*-2~
(a)
Considering the fact that we are proposing to en
large the field of eligible paper by admitting acceptances
bought in the open market when bearing member bank endorse
ments, why should we fear that there will not be enough elig
ible paper ?
(b)
When a member bank calls on a Federal Reserve Bank
for notes it presumably offers a quid pro quo of at least 1.
100# on the dollar, henco , it is inconceivable that when there
is a demand for currency by member banks, the member banks
will not be ready to offer eligible collateral for the currency,
especially, if we enlarge the field of eligibility which we
may do both by an amendment of the law and by a relaxation of
our Board rules in time of stress.
(3)
I am thoroughly in accord with the idea of combining
the assets and liabilities of the bank and of the Federal Re
serve Agent.
However, I am not at all sure that this can not be
done under the Federal Reserve Act as it stands.
think we ought to get an amendment.
If not, I
My theory is that the
Federal Reserve Board can publish condition reports of the
banks, stating that they are combined statements of the Federal
Reserve Banks and the Federal Reserve Agents, treating the
Federal Reserve Agent’s Department as if it were simply the Issue
Division
of the Federal Reserve Bank.
I agree entirely that
3 -
645
it is all wrong that if a ten millions of Federal Reserve notes are
put out against commercial paper, and at the end Of a three months'
period
is all paid off, although the notes continue to stay in cir~
culation, the notes should no longer appear as the liability of the
bank.
It seems to me obvious and proper that the outstanding notes
should appear as a liability of the bank and, per contra and as an
offset, the cash or collateral held against these notes ought to
be written up as an asset.
(4)
A fundamental proposition which seems to me must never
be forgotten and,
therefore,
should perhaps be re-stated is that
the relation of the member bank to the Federal Reserve Bank is
similar in general terms to the relation of an ordinary individual,
or corporation, to a commercial bank, having note issuing power.
The member bank comes to the Federal Reserve Bank to borrow credit.
It may need that credit in the form of a bank deposit, or in the
form
of currency.
If it takes it in the form of a bank deposit,
it may later draw out the currency, or, more likely, it will use it
to meet drafts upon it for transfers to other banks in other cities.
A member bank coming to the Federal Reserve Bank to borrow a million
dollars, in effect, gives its note to the Federal Reserve Bank, with
eligible collateral attached, for the full face value of its borrowing
6h6
-U .
t
and if we assune the Federal Reserve Agent's Department is part
of the bank, the bank nu$t keep this collateral against the loan.
Aside and apart from this, however, the Government which charters
the Federal Reserve Bank, says to that bank, and as a condition
precedent to its charter rights, " In order to compel you to be
cautious and conservative, we will require you to keep a reserve
against all deposit liability of 35$ a&d against all note issue
4
liability of U0$."
This is a matter between the Government and
the Federal Reserve Bank.
The 35$ and the Uo$ cannot be considered
in any sense as added collateral against either the deposits
the notes.
or
It is so lely Government regulation to accomplish two
purposes : First, to guarantee a reasonable amount of cash in
bank to quickly redeem notes that may be presented, or
repay
deposits, which may be called for, and, secondly, a condition
which 'will compel a bank, which is in the fullest sense a public
service corporation, to run its business on lines of extreme
Conservatism.
If the above statements are correct, it isn't
readily conceivable that a member bank will ever find itself
in a place where it has not enough collateral from member
banks to meet legitimate demands for currency, and certainly,
if we wish to create a good discount market in this country,
we ought to do everything we can to encourage member banks
to keep in their portfolios an abundant supply of eligible
•
paper*
It is far better to liberalize the law in respect to the
character of the paper Which may he offered by member bariks, or
to let down the bars so far as our rules are concerned, than it
is to weaken the fundamental provisions of the law in respect to
giving the credit by Federal Reserve Banks
(5)
Governor Hamlin cites the case of the panic of 1914, and
previous panics, showing that simultaneously with the rapid dimunition
in business, there was an active demand for currency.
He assumes,
therefore, that if these conditions should arise, the Federal Reserve
Banks might find themselves unable to meet demands for currency and be
compelled to weaken their cash resources by issuing the stock of gold
on hand.
This is an important point and should be carefully studied.
In the panics of 1907 and 1914, and indeed, as I understand it in pre
vious panics, what happened was that bank deposits were very largely
pyramided by reason of the reserve city and central reserve city system
so that St. Louis, Chicago
and most of all New York, held a large pro
portion of the bank deposits.
Two things which brought about this evil
were, first, that deposits could be counted, as reserves, in two places;
second, that interest was paid upon deposits.
The first of these evils
has boon cured by the Federal Reserve Act; the second still remains,
as a more or less serious evil.
If the Federal Re-serve Banks paid interes
GkS
-6 ~
on reserve deposits^or even on excess deposits only* we might
increase to this evil,, but, as we do not do so, so far as de
posits of the Federal Reserve Banks are concerned, the evil
is non-existant.
Thus it is that no member bank will keep
on deposit with the Federal Reserve Bank a deposit in excess'
of its actual requirements*
This will mean that they will
keep a minimum reserve requirement, plus... sufficient to meet
their own needs to pay their own drafts or checks and drafts
against them.
Hence, in the panicky times you will not have
the condition that you had in 1907 and I91U. Thon country
banks were calling on reserve city banks for cash, reserve
city banks on central reserve city banks, and the very fact
that there was a reluctance to meet these demands accentuated
them and increased the alarm.
Banks began calling loans,
stopped making new ones, or quickly raised their interest
rates.
this
This naturally put a sharp check on business. While
same
thing can happen again to a limited extent, es
pecially if a large proportion of the state banks stay out of
the System and if interest paid on bank deposits causes the
pyramiding of money at the large money centers, yet because a
large share of the reserves of the country are held by Federal
Reserve Banks, the evil possibilities from this cause has been
greatly diminished.
(6)
A number of Governor Hamlins calculations are
bas&d on the assumption of what he rails ,rfree gold",
or
546.
- 7 as he suggests in his assumption "capital”.
These assumptions,
lead. 6ne astray because they are contrary to certain fundamental
facts*
The only !'free gold" in the Federal Reserve Bank System
that I know of is the capital paid in by the members, approximately
$55,000,000, for although there is a liability against this, the
law does not require any reserve to be held to protect it.
The
capital can therefore be used on the basis of 2'k times as a re
serve for notes issued.
In addition to this capital, the princi
pal fund of the reserve banks amounts, in round figures, to $450,*
000,000, and will be about $500,000,000 after the 16th of May.
Against this reserve deposit, however, there must be kept 35$ of
reserve/ and only the remaining 65$ can be used as a reserve against
note issuing.
Thus the note issuing expansion for the reserve
deposit fund is upon the ratio of 1*625 to 1; not 2.5 to 1.
It may be argued that this is ultra-conservative, but I
believe it is proper, and we should leave it that way*
in time
of stress it would be better for the Board to reduce its reserve
requirements than to treat this reserve deposit, to use Goverhor
Hamlin’s expression, as "Free gold".
In conclusion, there are three amendments, to Section 16
which are immediately desirable:
* 8 -
First:
646
It ought to be possible to issue Federal Reserve
notes directly for gold.
It is conceivable, for example, that
at some future date, the Government will stop the coinage of gold,
or only use gold bars and issue certificates for amounts not less
than fifty or one hundred dollars against them; that hoiders of
these gold bullion certificates may frequently be glad to deposit
them with the Federal Reserve Bank and get currency in more con
venient denominations.
This ought to be possible and when
a
Federal Reserve Bank holds gold against its notes it should not
be required, considering the character of its collateral^ to catty
any reserve against it.
Second:
If it is not possible under a fair interpretation
of the existing law to combine the accounts of the Federal Reserve
Agents and the Federal Reserve Banks, so as to show all notes in
the hands of the public as a liability of the issuing bank and all
assets held against them as collateral as assets of the bank, then we
should recommend such an amendment of the law as would permit it.
Third:
We should ask for an amendment of the law which will
permit bank acceptances, or paper bought under Section 14, of the
Act, when accepted or endorsed by a member bank, to be made eligible
as collateral for Federal Reserve notes.
This will not only very
much increase the volume of paper which will be eligible for re
discount but willsassist in building up our discount market.
646
- 9
The above three amendments, I believe, are the only amend
ments which it is necessary, or desirable, to make to Section 16
at the present time.
Later on, 1 believe, at least one other
amendment should be made, ana that is looking toward the consoli
dation of the note
issuing functions of the Federal Reserve Banks.
It is very undesirable that there should be two kinds of notes
issued by the Federal Reserve Banks.
The re should be only one
kind and that a Federal Reserve Bank note.
If that idea should
meet with the approval of my colleagues and the Congress, the
Federal Reserve Banks would issue notes upon any of the following
plans:
(a)
For gold bullion,
(b)
Upon the note of a member bank, having behind it
eligible commercial paper as collateral,
(c)
Against the collateral of Government bonds, having
the circulation privilege.
If this were done, in case (a) no reserve would be required
of the Federal Reserve Bank.
In case (b)
a reserve of at least
40$ would be required unless the Federal Reserve Board should reduce
the requirement.
In case (c)
a reserve of 5$ would be required.
If this great reform were adopted, I should perhaps go
a step further and suggest that the elaborate, costly and compli
cated machinery of the United States Government in Washington
for refunding notes
should
be abolished,
and
that,
646
-1 0 -
in the place of it., the Federal Reserve Bank notes should
he made redeemable only at the counter of the Federal Re
serve Bank of issue under the supervision and rules of the
Federal Reserve Board.
F. A. DELANO.
6/lO/l6
6Us(a;
That section sixteen* paragraphs two,threerfour,five,six and
seven., of the Act approved -December twenty-third, nineteen “hundred and
thirteen, known as the Federal Reserve Act, as amended by the Act of
September 7 4 1 9 1 6 , be further amended and re-enacted so as to read as
follows:
"Any 'Federal reserve bank may ma&a application to the local
Federal reserve agent for such amount of the Federal reserve notes
hereinbefore provided for as it ir.ay require.
Such application
shall be accompanied with a tender to the Local Federal reserve
agent of collateral in amount equal to the sum of the Federal re
serve notes thus applied for and issued pursuant to such applica
tion.
The collateral security thus offered shall be notes, drafts,
bills of exchange, or acceptances rediscounted under the provisions
of Section thirteen of this Act, or bills of exchange indorsed by
a member bank of any Federal reserve district and purchased under
the provisions of Section fourteen cf this Act, or b?jikers' accept
ances purchased under the provisions of said section fourteen)! OR
GOLD OR GOLD CERTIFICATES;‘ BUT IN NO EVENT SHALL SUCH COLLATERAL SECURITY
WHETHER GOLD, GOLD CE:TIFICATES, OR ELIGIBLE PAPER, BE LESS THAN
; THE AMOUNT OF FEDERAL RESERVE NOTES APPLIED FOR. The Federal re**
serve agent shall each day notify the Federal Reserve Board of all
issues and withdrawals of Federal reserve notes to and by the Feder
al reserve bank, to which he is accredited.
The said Federal Reserve
.Board-may at any time call upon a Federal reserve bank for addition
al security to protect the Federal reserve nctes issued to it.•'Every Federal reserve bank shall maintain reserves in golf or
lawful money of not less than thirty-five per centun against it?
deposits and reserves in gold of not less than forty per centum
against its Federal reserve notes in actual circulation- PROVIDED,
HOWEVER THAT WHEN THE FEDERAL RESERVE AGENT HOLDS GOLD OR GOlp CER
TIFICATES AS COLLATERAL FOR FEDERAL RESERVE NOTESTISSUED TO THE
EANK SUCH GOLD OR GOLD CERTIFICATES SHALL BE COUNTED AS PART OF THE .
GOLD RESERVE WHICH SUCK BANK IS REQUIRED TO MAINTAIN AGAINST ITS
FEDERAL RESERVE NOTES IN ACTUAL CIRCULATION aad net aitset by geld
o f lawful meaey deposited with the Federal reserve agent.
Notes so
paid out shall bear uppn th6ir fades a distinctive letter and serial
number, which shall be assigned by the Federal Reserve Board to each
Federal reserve bank. Whenever Federal reserve notes issued through
one Federal reserve b^nk shall be received by another Federal reserve
bank they shf
?.ll be promptly returned for credit or redemption to the
Federal reserve bank through which they- were originally issued, OR,
UPON DIRECTION OF SUCH FEDERAL RESERVE BANK THEY SHALL EE FORWARDED
DIRECT TO THE TREASURER OF THE UNITED STATES TO BE RETIRED. No Fed
eral reserve bank shall pay out notes issued through another under
penalty of a tax pf ten per centum upon the face vaLue of notes so
paid out. Notes presented for redemption at the Treasury of the
United Stages shall be paid out of the redemption fund and returned
to the Federal reserve banks through which they were originally issued, and thereupon such Federal reserve bank shall, upon demand of
the Secretary of the Treasury, reimburse such redemption fund
in lawful money, or,
if such Federal reserve notes have
1151
648
-2 -
been redeemed by the Treasurer in gold or gold certificates,
then such funds shall be reimbursed ta the extent deemed neces
sary by the Secretary of the Treasury in gold or gold certificates,
and such Federal reserve banks shall, so long as any of its Federal
reserve notes remain outstanding, maintain with the Treasurer in
gold an amount sufficient in the judgment of the Secretary to pro
vide for a ll redemptions to be made by the Treasurer. Federal re
serve notes received by the Treasurer, otherwise than for redemp
tion, may be exchanged for gold out of the redemption fund herein
after providod and returned to the reserve bank through which they
were originally issued, or ittof may be returned to such bank for
the credit of the United States. Federal reserve note3 unfit for
circulation shall be returned by the Federal reserve agents to the
Comptroller of the Currency for cancellation and destruction.
nThe Federal Reservo Board shall require each Federal
reserve bank to maintain on deposit in the Treasury of the United
States a sum in gold sufficient in the judgment of the Secretary
of the Treasury for the redemption of the Federal reserve notes
issued to such bank, b\*t in no event less than five porcentum
OF THE TOTAL AMOUNT OF NOTES ISSUED LESS THE AMOUNT OF GOLD OR
GOLD CERTIFICATES HELD BY THE FEDERAL RESERVE AGENT AS COLLATERAL
SECURITY; but such deposit of gold shall be counted and included
as part of the forty percentum reserve hereinbefore required.
The Board shall have the right, acting through the Federal reserve
agent, to grant in whole or in parj or to reject entirely the ap-.
plication of any Federal reserve bank for Federal reserve notes;
but to the extent that such application may be granted the Feder
al Reserve Board shall, through its local Federal reserve agent,
supply Federal reserve notes to the bank so applying, and such
bank shall be charged with the amount of notes ISSUED TO IT and
shall pay such rate of interest e» said amount as may be estab
lished by the Federal Reserve Board and the amount ef ON ONLY
THAT AMOUNT OF SUCH NOTES IBICH EQUALS THE TOTAL AMOUNT OF ITS OUT
STANDING FEDERAL RESERVE NOTES LESS THE AMOUNT OF GOLD OR GOLD
CERTIFICATES HELD BY THE FEDERAL RESERVE AGENT AS COLLATERAL SE
CURITY. Federal reserve notes ae issued to any such bank shall,
upon delivery, together with such notes of 3uch Federal reserve
bank as may be issued under section eighteen of this Act upon se
curity of United States two percentum Government bonds, become a
first and paramount lien on all the assets of such bank.
Any Federal reserve bank may at any time reduee
its liability fer outstanding Fed^sfal ffeer-rvb''netes ^ de
positing with the Federal reserve agent its Federal reserve
i
1153
-648■
-3 -
netee, geld,geld eeFtifieates,- e r lawful »:eney ef the United States,
Federal reserve **tee ee deposited shall net he reissued, exeept upen
eemplianee with the eenditiens ef an original issue.
The Federal reserve agent shall held sueh geld, geld certi
ficates er. lawful ueaey available exelu&iuely fer exchange fer the out
standing Federal reserve aetes when offered by the reserve bank ef whleh
he is a direeter. Uj.cn the request of the Secretary oi the Treasury the
Federal Reserve Board shall require the Federal reserve agent to trans
mit ee i&uth ef the paid geld to the Treasurer of the United States SO
MUCH OF. THE GOLD HELD BY HIM AS COLLATERAL SECURITY FOR FEDERAL RESERVE
NOTES as may be required for the exclusive purpose of the redemption of
of such notes FEDERAL- RESERVE NOTES BUT SUCH GOLD ’
WHEN DEPOSITED WITH
THE TREASURER SiiAT.T- BE c m i E D AND CONSIDERED 4S IF .COLLATERAL SECURITY
ON DEPOSIT WITH THE FEDERAL RESERVE.AGENT.
Any Federal reserve bank may at its discretion withdraw
collateral deposited with the local Federal reserve agent for the pro
tection of.its Federal reserve notes depesited with it ISSUED TO IT
and shall at the same time substitute therefor other lake collateral
of equal amount with the approval of the Federal reserve agent under
regulations to be prescribed by the Federal Reserve Board. ANY FEDERAL
RESERVE BANK MAY RETIRE ANY OF ITS FEDERAL RESERVE NOTES BY DEPOSITING
THEM WITH THE FEDERAL RESERVE AGENT OR WITH THE TREASURER 07 THE UNITED
SPATES, AND SUCH FEDERAL RESERVE BANX SHALL THEREUPON BE ENTITLED TO
RECEIVE BACK THE COLLATERAL DEPOSITED WITH THE FEDERAL RESERVE AGENT
FOR THE SECURITY OF SUCH NOTES. FEDERAL RESERVE BANKS SHALL NOT BE RE
QUIRED TO MAINTAIN THE RESERVE OR THE REDEMPTION FUND HEP.ETGFORE PRO
VIDED FOR AGAINST FEDERAL RESERVE NOTES WHICH HAVE BEEN RETIRED;NOR
SHALL THEY BE FURTHER LIABLE TO PAY ANY INTEREST CHARGE WHICH'MAY
HAVE BEEN IMPOSED THEREON BY THE FEDERAL RESERVE BOARD. FEDERAL RESERVE
NOTES SO DEPOSITED SHALL NOT BE REISSUED EXCEPT UPON COMPLIANCE WITH
THE CONDITIONS OF AN ORIGINAL ISSUE.
655.
F E D E R A L
R E S E R V E
W A S H I N G
B O A R D
TO N
May 15, 1916.
Memorandum for the Board:
As requested, I have made a brief analysis of
the provisions of the Federal Farm Loan Act, as it passed
the Senate.
This Act was referred to the Banking and Cur
rency Committee of the House, and the Committee's report
appears to be a substitute bill which will have to be made
the subject of a separate analysis in order to show the
changes made in the substance of the Senate bill*
1 assume that the Board will desire this analysis
after the House Bill has been passed.
In analyzing the Senate Bill I have not attempted
to outline all the details of operation, but merely to show
the fundamental provisions and the general plan of operation.
Respectfully,
M. C. ELLIOTT,
Counsel.
a n a l y s i s o f f e d e r a l f a r m l o a n a c t as
PASSED BY THE SENATE.
* * *
May 12, 1916.
THE FEDERAL FARM LOAN BOARD.
The Act provides for the creation of a bureau in the De
partment of the Treasury to be known as the Federal Farm Loan Board
which consists of five members including the Secretary of the Treas
ury, who is made an ex-officio member and chairman.
pointed members receive salaries of $10,000 each.
The four ap
All salaries and
expenses are paid out of the general funds of the Treasury.
This board is authorized to employ attorneys, experts,etc.,
in the same manner as the Federal Reserve Board.
not under civil service.
The employees are
It makes an annual report of its operations
to Congress. Its general powers, as summarized in Section 20 are sub
stantially as follows:
(a)
To organize and charter Federal land banks, national
farm loan associations, and joint-stock land banks.
(b)
To review and alter at its discretion the rate of
interest to be charged by Federal land banks.
(c)
To authorize the issue of farm loan bonds,
(d)
To make rules and regulations respecting charges made
to borrowers on loans, for appraisal,examining titles,etc.
(e)
To require reports of condition and to make examinations.
(f)
To prescribe the form and terms of farm loan bonds.
(g)
To require Federal land banks to pay to other Federal
land banks their equitable proportion of sums ad
vanced to pay the coupons on bonds issued by such
banks.
655.
- 2 -
(h)
To exercise general supervision over (1)
(2)
(3)
Federal land banks,,
National farm loan associations,
Joint-stock land banks.
FEDERAL LAND BANKS.
The Federal Farm Loan Board is empowered to divide the
continental United States into twelve districts to be known as
Federal land bank districts to be designated by number, and to
create and organize in each district a Federal land bank with a
capital stock of not less than $500,000.
Board of Directors: A temporary board of five directors
is appointed by the Federal Farm Loan Board during the preliminary
organization of these banks.
This board is later replaced by a
board of five directors, three of which are elected by the farm
loan associations and two are appointed by the Federal Farm Loan
Board, one of the two so appointed being designated aS chairman.
Capital Stock:
If, within ninety days after the sub
scription books are opened, anf part of the minimum Capitalization
of $500,000 has not been subscribed, by individuals, firms or cor
porations or by the States, the Secretary of the Treasury is re
quired to subscribe for the balance on behalf of the United States.
This subscription, however, is later repaid to the United States
when a sufficient amount of stock is sold to other subscribers.
Ten per cent of each $100,000 worth of stock subscribed is in
vested in bonds of the United States not later than two years
after the payment of such subscription.
These banks may act as Government depositaries and fiscal
-
3 -
655
agents of the Government.
P ow ers:
They are giv e n the u s u a l co rp o ra te powers and. among
others the following special powers:
(1)
To issue farm loan bonds;
(2)
To purchase first mortgages on farm lands within the
district;
(3)
To deposit first mortgages with a registrar as security
for farm loan bonds;
(4)
To receive and set apart for expenses and profits one
per cent interest on endorsed mortgages;
(5)
To acquire and dispose of real and personal property
under certain conditions;
(6 )
To make deposits with Federal reserve banks or member
banks and to receive interest on the same;
(7)
To receive deposits from farm loan associations, but not
to pay interest thereon;
(8 )
To borrow money;
(9)
To buy and sell United States bonds.
Restrictions: Such banks are not permitted *
(1)
To accept ordinary demand deposits except from its stock
holders;
(2 )
To make loans on farm taortga.ges except through farm loan .
associations;
(3)
To accept other than first mortgages;
(4)
To issue bonds in excess of twenty times the amount of
its capital and surplus;
(5)
To receive any commission or charge not authorized by
the Act.
NATIONAL FARM LOAN ASSOCIATIONS.
These associations are organized by persons desiring to
borrow money on farm mortgage security.
Their directors are elected
in the same manner as national bank directors.
Their officers., other
than the Secretary-Treasurer, serve without pay, unless the Federal
Farm Loan Board approves a salary.
The Secretary-Treasurer acts
as custodian of its funds depositing same in such banks as the board
of directors may designate; pays over to borrowers sums received
for their account from the Federal land banks upon first mortgages,
and is the active officer of the association.
Subscribers; The incorporators of such an association
must consist of ten or more natural persons who are the owners
or who are about to become the owners of farm land, qualified as
security for a mortgage loan.
They execute an organization certifi
cate which is submitted to the Federal land bank, and, acting upon
the recommendation of the Federal land bank, the Federal Farm Loan
Board issues a charter.
The loan desired by each subscriber must not exceed
$10,000 nor be less than $200, end the aggregate must not be less
than $20,000.
The borrower must subscribe to stock in a sun equal
to five per cent of the desired loan.
These associations may be organized with limited or with
unlimited liability.
The capital stock is issued in shares of $5
each to borrowers, and this stock is held by the associations as
collateral security for the loan made, but the borrower may receive
dividends accruing and payable on such stock, and when the loan is
repaid the stock is canceled and the subscription is repaid or it may
655
5
be credited on the loan when the balance has been paid.
The
capital stock of these associations may be increased from time
to time -as additional loans are desired, and may be reduced to
any sum not less than five per cent of the unpaid principal of
mortgages held.
The special powers of these associations consist of
the right (1) To indorse and to discount with Federal land banks
first mortgages;
(2 ) To receive from such banks funds to be loaned to its
shareholders;
(3) To acquire and dispose of real and personal property
under certain conditions;
(4) To issue certificates of deposit at four per cent
per annum againsi deposits or current funds, conver
tible into farm loan bonds when presented at the
Federal land bank of the district in any multiple
of $25.
This stock carries with it the double liability of share
holder.
In the unlimited farm loan association the subscriber
enters into a contract to become individually liable for all con
tracts, debts, and engagements of the association’in addition to
his liability on the stock.
Loans Made by Federal land banks: Loans made by Federal land
banks are subject to the following restrictions:
(1)
They must be secured by first mortgages on fann land
located in the district;
(2 )
Each mortgage must contain an agreement for repayment
under the amortization plan;
(3)
They must run for not less than five nor more than sixty
years;
(4)
Payment may be anticipated by the borrower on interest payment
periods at any time after five years;
-6-
655
(5)
Interest rate limited, to six per cent.
(6»
Loans may be
(a) For
(b) For
(c) For
(d) For
(7)
Loans limited to fifty per cent of the appraised value
made the purchase price,
equipment, fertilizers,live stock,etc#
buildings &nd improvements,
discharge &f existing mortgages.
of the land;
(8 )
Applicant must state his intention to become within
3ix months engaged in the cultivation of the land
mortgaged;
(9 )
Loans to one borrower not to exceed $10,000, nor to
be less than $200;
1
.
(10) Application to be made in form approved by the Federal
Farm Loan Board;
(11) Borrower to pay ten per cent simple interest on de
faulted payments;
(12) The borrower must stipulate that if any portion of the
loan is expended for purposes other than those speci
fied in application, Or if he fails to comply with
terms of application, the loan shall at the option of
the mortgagee become due and payable.
JOINT STOCK LAND BiMKS.
Joint stock land banks possess substantially the same
powers as Federal land banks.
They may be organized by any number
of natural persons not less than ten.
They may begin business with
a capitalization of $250,000 in states of less than two million
inhabitants.
The Government of the United States is not authorized
to purchase or subscribe to any part of their capital stock. They
are not subject to the restrictions above enumerated on logins made
by Federal land banks, except that they are prohibited from receiving
•« .41
655.
- 7 -
any commission or charge not authorized by the Act,
directors may consist of more than five members.
The board of
The Federal Farm
Loan Board has a more limited supervision over these banks than
it has over Federal lalld banks.
Bonds issued by these banks and
known as joint stock land bank bonds are limited to fifteen times
the amount of the capital and surplus.
They are not subject to
all the restrictions of farm loan bonds, but are based upon first
mortgages and are in form prescribed by the Farm Loan Board.
They
are known as "joint stock bonds."
MISCELLANEOUS PROVISIONS.
The Act provides for examiners who are required to make
regular examinations of the banks and associations and whose sal
aries are paid out of the general funds of the United States Treas
ury.
It provides for appraisal committees to determine the value
of the land offered as security and for a registrar to hold the
securities against which farm loan bonds are issued.
The usual penalties applicable to bank officers are incor
porated in the Act.
The provisions of Section 22 of the Federal
Reserve Act are likewise incorporated.
Farm loan bonds may be purchased by Federal reserve banks
or member banks, by trustees or fiduciaries, and by the postal sav
ings trustees.
Acceptances or obligations of member banks secured by such
bonds are madeeligible for discount by Federal Reserve banks.
Ci
M
655
These hanks and associations are required to carry twentyfive per cent of their earnings to a surplus or reserve account un
til this account is equal to twenty per cent of their capital. Where
national farm loan associations have not been organized in any lo
cality after one year from the passage of the Act and it appears
to the Federal Farm Loan Board that they are not likely to he or
ganized, the Board may authorize Federal farm hanks to make loans
through approved agentst
One hundred thousand dollars is appropriated for
organization expenses.
Every Federal land hank and every national farm loan
association, including the capital stock and reserve or surplus
therein and the income derived therefrom, is exempt from Federal,
State, municipal and local taxation, except taxes upon real estate
held, purchased, or taken hy said hank or association under the
provisions of Section eleven and Section thirteen of this Act.
First mortgages executed to Federal land hanks, or to joint stock
land hanks, and farm loan bonds issued under the provisions of this
Act, are deemed and held to he instrumentalities of the Govern
ment of the United States, and as such they and the income derived
therefrom are exempt from Federal, State, municipal and local
taxation.
S I
655
- 9 -
R
E
S
U
M
E
’
The general plan of operation appears to be that, when
farm owners or prospective farm owners desire to borrow money for
the cultivation or improvement of farms or to pay off the purchase
price of such land or to discharge existing liens, ten 6r more may
unite to organize a farm loan association, subscribing and paying
for capital stock in such association equal to five per cent of the
loans desired.
Through this association am application is made to
the Federal land bank.
This application must recite that the
borrower is engaged or intends to engage in the cultivation of
farm land<
The Federal land bank may thereupon make loans to
the farm lo a n a s s o c ia t io n on the s e c u r ity of f i r s t m ortgages to
the extent of f i f t y per cent of the appraised Value of the
in question.
land
All of such mortgages must run for a period of at
le a s t fiv e years and not exceeding s ix t y yearsj and must Contain
or annual
an agreement for the payment of a fixed number of semi-annual/in*stallments sufficient to provide for am agreed rate of interest
during the term and for the payment of the principal during and
at the end of the term on the usual amortized plan.
In order to increase their loanable funds Federal land
banks may deposit first mortgages with a registrar as collateral
security for bonds issued by such banks.
These bonds which are
engraved by the Bureau of Engraving and Printing under direction
of the Comptroller of the Currency are issued in denominations of
$25, $50, $100, $500, and $1,000.
They have interest coupons at
tached payable simi-annually and bear a rate of interest not to
M Q2
-S j e o
-LJl<JO
- 10 -
exceed five per dent.
655.
The "bonds So prepared are deposited in the
Treasury and sub-'-treasuries to be held subject to the order of the
Federal Farm Loaii Board.
When loans are repaid to the Federal land banks or to
the joint stock land banks the proceeds are used (a)
To pay off farm loan bonds as they mature,
(b)
To purchase such bonds,
(c)
To loan on first mortgages,
(d)
To purchase United States Government bonds,
(e)
To be held by t£e registrar as security for the
payment of such bonds.
»
5/15/16.
657
Remarks of
Hon. Paul M. Warburg
at the dinner of the
Economic Club of New
York, May 32nd, ISIS
When, six reeks ago, I had the honor of ad
dressing the Conference of the International High
Commission at Buenos Aires, I told the delegates
that I considered myself an "exchange professor"
whose most important function, while in foreign
countries, was not so much to teach as to learn
and then, upon his return, to impart the useful in
formation acquired t6 his own countrymen.
This is the first opportunity which I have had
to perform this mission, and I consider it, there
fore, a duty to tell you one of the first and most
inspiring impressions I received during my stay in
foreign lands.
This was at Rio de Janeiro, when
our excellent Ambassador, the Honorable Edward
Morgan, gave me the startling news that, in South
America, after dinner speeches were not the fashion,
and that Brazilians, in this respect as indeed in
many others , were a highly advanced and kindly na
1165
657
(3)
tion, permitting their guests to enjoy their dinner
in peace'.
From that moment on I began to enjoy my
trip, and I mention this incident to you because I
know it will be an added stimulus to many to start
out for the v;onderful lands o f .our Southern Hemi
sphere.
I was much relieved to see from tonight's pro
gram that I am not listed among the "speakers", but
that I am classified only as a "guest of h o n o r " .
Much as I should have enjoyed the privilege of ad
dressing you at length, the accumulation of work
since I returned two weeks ago has been such that,
to my great regret, I had to inform your president,
when accepting your kind invitation, that it would
be quite impossible for me to prepare an address
befitting this occasion.
I am glad of this oppor
tunity, however, to make a few informal remarks
but not a speech.
Permit me to say, then, how much I appreciate
the great honor you have done me in inviting me to-
1186
657
»
(3 )
night, how glad, I am to meet again my fellow members
of this club, and with what pleasure I am looking
forward to listening to the addresses to be deliv
ered by your speakers.
The topic, "New Opportunities for American
Commerce and Industry" is, of course, one of the
profoundest interest to me, particularly in its
bearing upon our relations with our sister repub
lics of South and Central America.
In considering this question, we might well
ask ourselves:
are new for us?
Why is it that these opportunities
Is it that these countries have
changed, that we have changed or .is it that the
world about us has changed?
The truth of the m a t
ter is that most radical upheavals have taken place
in all three directions, so drastic indeed that
economic relations all over the ‘
w orld will have to
be readjusted at the end of the war.
The United States, in the beginning of 1914,
was moving towards the position of an industrial
118?
657-4
and financial world power.
The advent of the war
precipitated this development with unparalleled
rapidity and to an unprecedented degree; so that,
as a result, our evolution from a mere agricultur
al and borrowing community into a great agricu}industrial
tural/and lending power has now been completed.
While our own economic status has thus been
strengthened, the wealthiest countries of Europe
have been destroying their saving power at the
rate of approximately $85,000,000 a day; and while
our own economic position as against these other
nations has been consolidated by a sure which has
been estimated at about two to three billion dol
lars, their own indebtedness has increased by more
than thirty billions.
And, unfortunately, this
condition continues to grow and nobody can at this
time foresee how long the cruel hand of destiny
will continue to grind into dust what it has taken
generations of human toil and endeavor to create.
1 1 8 8
65?-5
When we look into the future we ponder and
wonder hovj these countries will manage to carry
the burden under which they have to struggle.
While we still hope that the load will not smother
them, there is no doubt but that it will absorb
so much of their strength that other countries
that in the past have been developed largely by
the excess saving power of some of these nations
will, for years to come, fin d ,this fountaih fun
dry or at least drastically reduced.
That means,
generally speaking, that the economic progress of
our globe 'will be retarded for a generation or
more, and that those nations will feel it the most
that were accustomed to depend upon European funds
for the development of their resources and had not
proceeded far enough in this development to be
able, as we were, to dispense with the assistance
afforded by foreign capital.
This thought was borne in on me very vividly
in South America.
Magnificent countries, resplend-
1189
S57-S
ent with natural wealth and wonderful opportuni
ties are now threatened in their progress by a
struggle not their own and thousands of miles away.
The deep significance of the situation impressed
me all the more because of its similarity to the
history and the problems of our own country and
because .1 was conscious of the fact that the Unit
ed States would have been in precisely the same
position had this world conflagration taken place
some twenty years earlier.
We have to visit these great South American
republics in order to realize the strong bond of
affinity that exists between them and ourselves;
in spite of differences in antecedents and language.
When I spent an afternoon at the country house
of a leading cabinet minister of one of these re
publics - a house possessed by the family for gen
erations - when I admired the wonderful old trees ,
the rooms full of books and art treasures, the
■walls covered with beautiful pictures of all
1170
657-7
schools , when I glanced at the old family portraits
- and the new ones by Zorn, Sargent and Boldini - I
had the same feeling that an old Hew England or
Pennsylvania or Virginia family mansion 'will awaken
in u s , or an old house in Washington Square in New
York.
Here, indeed, I saw the descendants of- the
Spanish Pilgrim Fathers'.
And again, when I studied
the histories of these nations and saw their monu
ments erected to the memory of Bolivar and San Ma r
tin, I fully realized that these countries, too,
had their Washingtons and their glorious wars of
independence and their periods of transformation
from colonial dependencies into sovereign republics.
They have their race problems, their, immigration
problems ana, like the United States, while reaping
the advantages of a democratic form of government,
they too have to struggle with the difficulties caused
oy the premature and indiscriminate granting of equal
suffrage to masses at the time not sufficiently educat
ed.
But, gentlemen, visit Uruguay, the republic
1171.
*
657-8
that, ten years ago, held the record for frequent
revolutions, and you will now find that it is the
Stats of Wisconsin of South America, or - perhaps it out-Wisconsins Wisconsin,
You find a most mod
ern, highly progressive administration; governmentowned banks, and lighting plants, trams and hotels
owned by the municipality; beautiful universities,
splendid agricultural and veterinary schools,' and
prisons so attractive and modern that I asked to
have a cell reserved for myself - in case of need.
And as the keen and intelligent men, now in charge
of the administration of the country take you
through their public buildings, and as you see the
wealth and progress of.the country, there comes to
you the profound conviction that the swamps breed
ing the mosquito that spreads the infection of
that are the foumd-tion of our own national growth: the influences
revolution are laid dry by the same influences/of
education, industry and political equality and
liberty.
I wish that etiquette would permit ms to de-
1172
657-9
scribe to you some of the statesmen we met.
I use
the word statesman advisedly, for w e found men of
the rarest type, courageous and sincere and inspir
ed by the highest ideals.
It would be presumptuous on my part - after
so rapid a visit to these vast countries - to at
tempt to picture to you the indescribable charm of
Rio, or the untold and untouched riches of Brazil a country larger by 269,000 square miles than the
United States proper and having a population of
only about twenty-three million people - or the
endless Argentine plans, teeming with grazing cat
tle, or Buenos Aires, the city of over a million
and a half inhabitants, with New York spirit and
Paris taste, or Chile, the California of South Am
erica, with its wonderful climate, its virile race,
its undeveloped water powers and mineral wealth.
I can venture only to speak to you in bird'seye-view terms.
But, speaking in these terms and
fully conscious of the fact that generalization can
±73
*
657-10
never do justice to all the phases it appears to
cover, we might say that the wealth of these coun
tries, the lavishness with which nature has treat
ed them,, h a s , to a certain extent, been the cause
of their weakness.
It has made many of them de
pendent upon the marketing of a few single staplesbe they coffee, rubber, cattle, wheat, nitrates or
guano - it has prevented them from diversifying
their industries, from producing at home many a
thing that they purchase abroad, and it has made
them extravagant instead of teaching them thrift.
And again, gentlemen, we need not go very far to
find the parallel in our own country.
The present world crisis has taught them - as
it has taught us - the necessity of economizing,
of importing less extravagantly, and of developing
more intensively their own resources and industries.
At the same time, it has brought home to them most
forcibly the other necessity of never again being
found dependent exclusively upon the ships, credit
'•$ "I 74
657-11
or good, will of Europe to reach their markets.
It
is not only a humiliation to the national pride of
these nations to be told from whom they may buy in
their own countries and to whom they may sell abroad, but their very economic life has been placed
in jeopardy by the temporary withdrawal of shipping
and banking facilities, and by the extortionate
freight rates exacted for what little tonnage has
still been left over to take care of their trade.
They look to us to remedy a situation which is as
unbearable to them as it is to ourselves.
They
feel themselves at one with us in this respect,
for it is for our own protection as well as theirs
that the "stars and stripes" must fly over a mer
cantile fleet large enough to ensure the independ
ence of the trade of this hemisphere!
They fur
thermore trust that our own financial emancipation
will be an important factor in securing greater
financial independence to them.
I returned from these Southern shores with the
feeling that North, Central and South America are
one economic unit, not only because nature has made
us neighbors,
inhabitants of the same great conti
nent, but because our historic traditions, our po
litical ideals and our economic problems and inter
ests are substantially the same.
While they are
following in our wake, we are headed for the same
goal, and the rocks and cliffs are the same in
their course as in ours.
Central and South America and the United States
are not competitors; they supplement one another.
The more our population grows; the more we develop
into an industrial nation, the more we ourselves
shall consume foodstuffs that we used to export in
the past, the more shall we be called upon to im
port the products of the Southern Hemisphere and
export in return the articles that our manufactur
ers will supply.
It is but a short time since we began to take
1176
657-13
an interest in South and Central American affairs.
The reason is clear; economically ce had not reached
the point of development of being an industrial and,
from the banking point of view, a lending nation.
The consequence was that we were provincial, satis
fied 'with our business opportunities at home, and
unwilling to study and adjust ourselves to the
habits and thoughts of other nations.
Changed conditions have brought about a dif
ferent condition of mind.
sides.
A change of mind on both
As Ambassador Stimson put it in a speech at
Buenos Aires, we were like fishermen living in a d
joining cottages facing the Atlantic, having all
the windows towards the ocean, and looking across
the sea'all the time, with no means to look at each
other.
We now have broken a window into the ad
joining wall; for the first time we begin to know
and understand each other, and I, for one, should
like to prophesy that, by mutual consent, very soon
we shall widen that window rapidly and make it a
657-14
very large and. comfortable door.
How that may best
be done, others better qualified than I will discuss
tonight.
Let me express only these general thoughts:
Europe's saving power being crippled while our finan
cial power has grown by her misfortune, there is no
doubt that it will be both our opportunity and our
duty to assist in developing the resources and indus
tries of those of our sister republics that are still
dependent upon foreign credit for the completion of
their economic development.
Let us bear in mind, however, that the best
business policy is not only the square deal, but the
fair deal,
permanent business relations are not
established by driving a hard bargain, but by trans
actions fair and equitable to both parties, and that
applies as much to the South and Central American
who desires to establish a market for his goods or
securities with us as it does to the North American
entering these new fields.
78
657-15
Furthermore, in order to perfect the establish
ment of intimate relatiorts with these nations, we
must understand and speak their languages-.
dence is the basis of business.
X
Confi
If we do net under-
stand these people, their methods or their point of
view, we cannot deal with them with that considera
tion and discrimination to which every human race
is entitled.
We must be able to discriminate be
tween the good and the bad amongst them, as they
must be able to discriminate between us, but, having
found the best, we must deal with them on the basis
of the same full confidence and equality as we would
deal with the very best amongst ourselves.
I wish that I could impress our business men
with the importance of sending abroad only men of
experience and high standing, such as enjoy their
confidence to a sufficient degree to permit them to
discriminate and not be bound by uniform and narrowrestrictions.
Let us remember that a country is
often judged by the first business representatives
■f±79
657-16
it sends abroad, and let us, therefore, do all we
can to keep away all elements that might do injury
to the standing and reputation of our merchants
and manufacturers.
The United States Chamber of
Commerce agreements for the arbitration of busi
ness disputes will be important factors in pro
tecting the good name of American business men in
foreign lands.
vail.
Glib talk and speeches will not a-
We shall be judged by our acts.
And, furthermore, while, for years to come, we
shall have a telling advantage in all work of devel
opment leading to more or less permanent investment
in South and Central America, Europe will bend every
effort at the end of the war to regain her full
share in the regular commerce of these countries.
She will need this trade much more than we do and
we shall not be able to secure a fair proportion
except by a determined and persistent effort.
These
markets cannot be conquered by spasmodic outbursts
of energy and enthusiasm, but only by unrelenting
"ISO
I
657-17
ana well organised work.
Nor can re expect to succeed unless this, our
"land Of lioerty", gives as much freedom to American
enterprise - merchant, manufacturer, shipper or
banker - as is enjoyed by our European competitors.
Our banks must be as free to go into foreign coun
tries and to finance this foreign trade according
to the local usages and requirements as are the Eu
ropean banks, which are practically free from legis
lative restrictions in this respect.
Great headway
has already been made during these last two years,
and we have reasons to hope that some of the recom
mendations made by the Federal Reserve Board tend
ing further to increase the scope and efficiency of
American banking in foreign countries will be acted
upon promptly and favorably by Congress.
A discussion of "New Opportunities for Ameri
can Commerce and Industry" naturally brings to mind
two of the most constructive achievements of our
generation —
the Federal Reserve Act and the Panama
I
657-13
Canal.
It is impossible, however, to discuss to
night the important effect of the Federal Reserve
System upon the development of our foreign trade
and the great progress already made by our banks in
these fields, or to describe the thrilling impres
sions received by us all during our trip through
the Panama Canal, this wonderful piece of engineer
ing which, by cutting apart the North and the South,
brought them so much closer together.
Let me, in
closing, relate to you only one little incident
that deeply impressed me at Panama.
Admiral's wife said to me:
An American
"I am sorry we have to
leave Panama and go home, because it is such a
splendid place for my children."!
Panama and yellow
fever 7«Tere words almost synonymous in the past; no
higher compliment 'was ever paid American engineering
and medical skill than this mother's comment.
It
is this kind of viork - the beginning of which we
saw at Haiti and the complete, final success of
which we perceived at Habana - that constitutes the
I
657-19
highest type of constructive work, a contribution
upon which every American may look with just pride*
I hope that American business will make for
itself an equally good record.
Our South and Cen
tral American fellow citizens 'will then esteem and
love us - even though we should carry into their
innocent countries the bad habit of after-dinner
speeches.
Finis.
5- 18- 1 6 .
1183
658
RELEASE FOR PUBLICATION
IN AFTERNOON PAPERS MAY 2 ^ iqi6
NOT EARLIER.
HOW THE FEDERAL RESERVE SYSTEM IS MEETINO THE REQUIREMENTS
Address
of
A. C. MILLER
Member of the Federal Reserve Board
Delivered May 2k, igi6
at the Annual Convention of the
MISSOURI BANKERS’ ASSOCIATION
at St. Louis
RELEASED FOR PUBLICATION IN AFTERNOON PAPERS OF MAY 2*1,1916.
^
HOW THE FEDERAL RESERVE SYSTEM IS.
MEETING THE REQUIREMENTS.
* * * * *
The financial outlook for the United States has never
been so full of interesting possibilities as at the present time,
nor has it ever called for a more definite understanding of whence
we have come, where we are at, and whither we are going.
In the
course of the past year and a half we have replaced financial
dependence upon Europe by dependence upon ourselves and we have
also been able to extend a very considerable measure of financial
service to some of the warring nations, and to many of the neutral
countries of South America.
The record of our material and fi
nancial progress in the past year and a half discloses results
which are stupendous and seem little short of miraculous.
Much has been said of our new opportunities; but it
is important that the banker, who has a very serious part in
shaping the course of business and tempering the spirit of the
community to a new situation, should recognize that the situa
tion with which we are confronted is not alone pregnant with op
portunity, but is also weighted with serious responsibility.
It is, indeed, doubtfullwhether any country in the history of
modern commerce has ever been faced by a situation so calculated
658
-2-
to challenge the best of which it is capable in conceiving
and carrying to fulfillment great plans.
It is a situation
which invites to a mastery in the world of finance and of
large affairs; but to attain this mastery we must first be
come masters of ourselves and of our own by developing to
highest efficiency instruments of direction and control
which match our splendid resources.
It calls, moreover, for
a new type of business leadership and a capacity for co
ordinated action on a larger scale than we have been accus
tomed to in order that we may be able to act with wisdom,
vigor and effect in this new region of affairs and responsi
bilities into which we have entered.
It is fortunate,- indeed it would be difficult to
exaggerate the degree of our good fortune,— that the most im
portant and considerable step toward fitting ourselves to meet
the new occasion should have been taken in advance of the great
changes in the sphere of international relationships, which
are bound to come as one of the results of the war.
I
refer
of course to the establishment of our new banking organization,
the Federal Reserve System.
That system, and what it stands for,
must be, as indeed, it has already proved itself to be, our
chief reliance in meeting our new responsibilities and in turn
ing our new opportunities to profitable account for ourselves
1186
and to benefit for the rest of the world.
No agency of resource
in the field of finance which the nation today possesses or has
ever possessed is comparable in its potentialities to the Fed
eral Reserve System*
It is, not only the newest thing in Amer
ican finance, but also the best thing.
Until we definitely
understand this, we are not in a position to do our best in
meeting the new occasion.
To recognize this is the beginning
of wisdom.
It is also well that we should recognize that the
atmosphere was never so propitious for the discussion of ques
tions of finance upon the broad and high jslane of national
interest and policy as now.
I believe I speak truly and with
strict fidelity to the historical record, when I say that for
the first time since we, as a nation, began to make financial
history, questions of currency and finance and banking have
ceased to be political and party questions.
To have taken
the banking question out of politics, where it long fingered
to the prejudice of the nation’s commercial and financial
interest, is a matter of sufficient moment and promise to en
title it to rank as a real achievement. Whatever differences
may have existed on questions of banking policy before the
establishment of the federal Beserve System/ they have pretty
much ceased to exist since.
The country, as ybu know, has set
its approval upon the federal Reserve Act as a piece ol funda
mental legislation on which to build arid Uhdef which we are
to develop the banking system of our expanding industry and
commerce for delcadsS to come.
So well was the work of legis
lation done, and Sc completely hafe the result been accepted
and approved by the business; b&rikihg and general public opin
ion, that the banking question has fortunately at Iasi ceased
to be a problem of legislation and has become one cl admihis*
tration.
Congress has given us a superb instrumentality; it
is for our bankers and those who are charged with the adminis
tration of the new law
strumentality
to do their part in using this new in
wisely and effectively in strengthening the
financial foundations of our industry and promoting its
healthy, prosperous and steady growth.
. The test of a banking system is the aid it gives
to productive enterprise by supplying its credit needs.
Banks
become powerful and valuable auxiliaries in the industrial
system in proportion as they give increased activity and
mobility to the community’s industrial and commercial capital;
658
-5and 'banking profits and prosperity are never so legitimate
and so fair an indication of the character and quality of the
service banks are rendering, as when they prosper and flourish
along with the communities in which they exist.
The changes
which were made in our banking system under the Federal Re"
serve Act were designed to accomplish many different things,
but the goal toward which everything pointed was that of mak
ing the
nation*s credit facilities more widely available
in all useful and legitimate ways for industrial and commer
cial employment on terms of safety, and of such ease as is
consistent with safety.
How far the new banking system is
fulfilling the promise of its sponsors and meeting the expec
tations of .the nation, more particularly how it has met the
a
tests which its first year and/half have brought, are ques
tions of the kind which suggest themselves at a time when
the nation, throughout its length and breadth, is taking stock
of its capabilities and when "preparedness" is its watchword.
For the new system is no longer a theory, but a fact. It is
in actual operation, with a record which can be examined,
and which can be tested by results.
658
•f
The new "banking organization has already found its place
in the American financial system and has already made an enviable
history for itself.
Its influence has not only been felt in every
part of the country, but has reached across the seas.
It has had
to meet conditions and circumstances in many respects more unusual
than could have been contemplated by its framers, and yet so well
contrived and so flexible is the structure of the new banking sys
tem that it has been found capable of adjusting itself to each new
condition.
It has thereby given evidence of its capacity for
growth and development along with the changing and expanding needs
of the American credit and business system.
It is just this qual
ity which takes the Federal Reserve Act out of the class of ordi
nary financial legislation and makes the new banking organization
a system in a very real and far-reaching sense.
In breadth of
conception the Reserve Act is a constitution rather than a statute;
a financial constitution characterised, as an organic act should be,
by that quality of adaptiveness which has always been the boast of
our great ■political constitution, and a quality which v<e have long
since come to regard as an essential, not to say the sovereign,
element in any great and vital piece of constructive legislation.
In reviewing the working of the Federal Reserve Banks I
wish to direct your attention to four or five aspects of the new
658
-
7-
system which in my judgment are calculated to disclose the capab
ilities of the system and the temper and wisdom of its adminis
tration.
1.
It has facilitated the growth and financing of the
country's enormous foreign trade.
2.
It has met the requirements, of domestic trade, par
ticularly the requirements of the crop-moving season and has
shown a capacity to ease and steady discount rates.
3*
It has shown capacity to absorb the redundant gold of
the country and restrain inflation.
It has shown capacity to maintain an atmosphere of confidence.1
1.
Growth and financing of foreign trade.
The‘financing of our foreign trade was always a sensi
tive point in our credit system, and foreign exchange has long been
regarded as a very accurate barometer of our international position.
The year 1915 witnessed the largest foreign trade ever experienced
by this country, the export trade particularly attaining the colos
sal magnitude of $3 ,600,000 ,000, an amount $1 ,000,000,000
of the highest amount hitherto recorded.
in excess
658
-8-
The large excesd of exports Over imports of merchandise
credted a balance of trade ift our favor of unprecedented character
and dimersitms and subjected our purchasers to the necessity of
resorting to the American money market in order to obtain funds
with which to meet their obligations.
The new banking system met
every requirement of this -unprecedented situation without diffi
culty.
At no time since the opening of the Reserve banks has
there ever been any doubt of the ability of our banking system,
by means of the newly established system of acceptance credits
or otherwise, to take care of the financing of the country's ex
ports, however large the excess of these over imports might become.
The growth in our exports has been continuous,.
The last month for
vdiich w9 have complete figures, March, 1916, 3hows exports over
$100,000,00s) in excess of March,, 1915.> an aggregate of $U09,850,~
and which promises an estimated total for the year of be
tween $U,000,000,000 and $5 ,000,000,000 . When we contrast the
ease with, vsiiich we now finance a volume of trade which would have
staggered the imagination a few years ago, with the clumsy shifts
to vdiich we were frequently reduced under our old methods of fi
nancing, we get some idea of how fundamentally and effectively our
banking machinery has been improved by substituting for a precar
ious dependence upon foreign facilities those of our own making
653
and control.
You bankers will recall the situation into which our
foreign exchange was plunged at the beginning of the European
war before our new banking machinery had "been set in operation.
Our bankers, as had long been their custom, had drawn heavily
during the summer on England.
The estimated amount of our short
time indebtedness maturing before the first of January, 1915;
was from four to five hundred millions of dollars.
expected that
It had been
this would be taken Care Of by the proceeds of
cotton and grain bills which would, be drawn with the export of
crops.
The sudden suspension of our foreign trade and equally
sudden termination of our foreign banking credits left us in a
serious
position.
I recall a conference of momentous import,
held in the office of the Federal Reserve Board and attended
by leading bankers identified with international financing, at
which was discussed whether and how our accruing obligations
could be met.
It was decided that they could be met and there
fore should be met no matter at what inconvenience to ourselves
and no matter at what cost in the loss of gold.
3y that act
\
was laid a foundation for the future of .America as a world
banker and to the faith thus inspired in the integrity and the
capacity of the .American banking system we owe very largely the
658
-10enviable position that. we have, in the brief period of little
sore than a year, attained in the international money market.
Such an embarrassment as we suffered in the early autumn of
191U is all but unthinkable under our new banking system, unless
there should be a breakdown of transportation facilities.
is not a theory;
This
it is a fact which is thoroughly attested by
the experience and events of the past year-
We have not only
received from Europe during the year ISiy over $’
4-00,000,000 in
gold, but we have taken back American securities and arranged
additional credits to a combined total estimated at $2,000,000,-
000.
A year ago dollar credits were practically unknown in
a
foreign centers; today dollar exchange is,/re cognized and estab
lished
medium of international commerce and one of the most
prized, because the most stable, unit of international payment.
The acceptance business, iGr many generations the peculiar do
main of English banks and the source of much of England’s pres
tige and power and profit in banking, has been successfully natur
alized on American soil and is thriving.
Complete and
accurate
figures are not available, but it is a safe statement that the
volume of acceptance credits created in behalf of the foreign trade
of this country has averaged for several months $100,000,000 and
658
-n~
now amounts to over $200, OCC,OCO, nnd the amount heid by th& Rsv"
serve 'banks to $U8,000,000.
The certain knowledge that accept
ances of a sound character will find ready discount 6 t purchase
at the counters of the Federal reserve banks and at rates as
low as two per cent, which is lower than has ever been enjoyed
by any class of commercial paper in this country, has given a
feeling of assurance to our bankers in entering this new and un
familiar field and has thus enabled them to gain a foothold in
it and to make it for all time an important and invaluable de
partment of American banking.
2.
Domestic trade, crop-moving, and discount policy.
While this important extension of American banking en
terprise into the foreign field was taking place, our banking sys
tem, with the support of the Federal Reserve Banks, was assisting
in the tecuperation and extension of our home trade and industry.
The home‘trade i3, after all, the basis of the country’s indus
trial activity and prosperity.
However large and important the
foreign trade may bulk in the popular imagination, however muchattention may be given to it in the financial columns, and how
ever important it may be in fact, it is still the truth, which
1195
deserves to Toe emphasized, that ours is primarily a country of
inland trade and industry,
Among the nations which have reached
a high degree of economic development, there is no other in which
inland trade beass so large a proportion to foreign trade.
Ac
cording to competent estimates, it is at least twenty-fold the
volume of our foreign trade and it is therefore the necessities
and the interests of our home production and consumption that
deserve especial consideration in any attempt to estimate how
well it is being served by the banking organization.
Are its
needs being supplied on reasonable terms and with the assurance
that accommodation can always be had on s atisfactory security?
To ask this question is to answer it, so universal is the knowl
edge of the comfortable conditions which have obtained in the
money markets of the country and generally throughout the coun
try since the Reserve banks were put into operation.
How completely the requirements of the crop-moving
season have been met is also a matter of wide experience, if
not of common knowledge.
Never before within the recollection
of this generation have the credit and currency needs incident
to the gathering and the movement of the crops been met so easily
and so smoothly and so quietly.
The operation of the Gold Set
tlement Fund which has been established to facilitate the settle
1196
658
-1 3 -
ment of exchange3 among the Reserve "banks and to reduce to the
lowest point the shipment of currency from one part of the covintry to another, ie, in large measure to be. credited with the
happy result which has been attained.
The autumnal pressure on
leading money markets and the consequent tightening of money
rates has come to he regarded by many as something that was in
evitable in a country
subject to such large periodic require
ments of cash for the movement of its staple crops.
The last
crop-moving season, the first which ha3 had the benefit of the
machinery of the Federal Reserve banking system, passed without
any untoward incident and without any indication of perturbation
or strain in the great money centers.
Indeed, if the. experience
of the past j’ear may be taken, as I believe it may, as prophetic
of the great change wrought in our banking'mechanism by the Fed
eral Reserve Act, the disturbances associated in the: past with the
autumn requirements may be regarded as an easily manageable factor
in cur credit ahd banking situation.
This, in itself, is a tri
umph which deserves to be signalized in estimating the workings
of our new banking system.
With rates ruling as high a 3 six per cent .for commer
cial paper when the Federal Reserve Banks were opened in the late
autumn of 19 lH, and when the financial disorders .incident to the
1197
658
-lU-
European war still presented a troublesome situation, and with
some variation of rates between different districts, the Reserve
banks, during the year 1915 / greatly reduced the general level
of discount rates and maintained them at a remarkably steady
level.
The opening quarter of the year 1916 saw rates of from
two to four per cent on bankers1 acceptances, the rate in actual
practice, however, running very close to the lower limit.
Trade
acceptances at rates of from thi'ee to three-and-a-half per cent;
rates on short-term paper up to ninety days at rates of from four
to four-and-a-half per cent, were the noteworthy features in the
discount rate situation.
The fact that rates a3 low as three and
three-and-a-half per cent were established on commodity paper,(that
is, notes and bills secured by x'eadily marketable staples), and the
further fact that the Reserve banks stood ready to take and have
freely taken agricultural paper at rates of four-and-a-half to
six per cent, shows that the banking accommodation provided by
the new system is not restricted to any class of borrowers but is
available to all classes where the security is of the type ap
proved for Reserve bank operations.
.These various rates are lower than have ever been en
joyed for like classes of paper in any considerable section of
the country.
What i3 perhaps more important from the point of
658
-
15-
view of the geographical distribution of the facilities of the
new system, there has "been a marked approach to uniformity of
rates among the several Reserve banking districts, a nearer ap
proach than has heretofore been experienced.
Whether it will
be practicable for a long time to come to maintain identical
rates throughout the twelve Federal reserve districts has been
questioned.
Such an outcome may not be likely as long as there
are marked differences in point of economic maturity in the
different sections of the country, nor is the successful opera
tion of the Federal reserve system predicated upon the assump
tion that discount rates must be uniform in all the reserve
districts.
lOne of the important features in which the region
al system differs from the plan of the National Monetary Commis
sion for a central bank with branches is that it does not re
quire uniformity of discount rates but allows these rates to be
adjusted to the conditions of demand and supply in the respect
ive districts.
These conditions are admittedly so divergent
that any attempt to ignore them altogether in the determina
tion of Reserve bank rates might well be regarded as undue in
terference with the necessary operation of natural forces and
would sooner or later result in embarrassment.
As long as the
different sections of this vast country of ours are in differ-
ent stages of economic development with respect to the need
for, and the accumulation of, capital, it
i3
to be expected
that there will be differences in the rate of interest and also ,
therefore, of discount rates.
But the disparity which long ob
tained between the rates in some of the younger and less highly
developed sections and the older centers, was undoubtedly in
large measure due to the peculiar banking policies and prac
tices which had grown up under our old banking system, and which
were, to a certain extent, fostered by the law.
But whatever
the causes, the result- was an artificial disturbance of the
natural distribution of the country's supply of credit facili
ties and a condition which threatened, if left to itself, to
develop into an artificial and unwholesome interference with
the free flow of the nation13 credits. To the extent that such
was the case, differences of commercial rates were without
solid
justification in economic law and to that extent at
least we may expect that these differences will be mitigated,
if not altogether eliminated, under the operation of the forces
sot in action by the Reserve Act for diffusion of credit facili
ties and for local control of credit conditions by regional
banks.
The rates which have been maintained by the Reserve
1200
-i7-
658
Banks throughout the past year or more are probably not to' be
regarded as normal, except in a temporary sense. The conditions
ol the past year and a half have admittedly been extraordinary
and have worked toward easy conditions in the credit markets of
the country.
When we have digested the immense volume of poten
tial credit set free by the new banking reform and are no longer
subject to the depressing influence on rates exercised by the
great influx of gold which we have had, it is certain that rates
will advance.
How soon the demand will catch up with the supply
can only be conjectured; so too, it is a matter of conjecture
what the normal rate of discount will be when the demand and
supply of loanable funds are more nearly in equilibrium. Much
will depend upon what is one of the most difficult of the war’s
effects to forecast; namely, the effect of the interruption and
suspension of a large part of the customary commerce and in
dustry of the European world and the destruction of an untold
amount of industrial capital, upon the permanent interest rate.
In
the long run the interest rate on fixed investments is
bound to influence short term money rates.
In the long run,
too, there will be a tendency for both investment rates and
commercial rates in the leading financial centers of the world
to move toward a common level.
The course of the money market
658
-18 in this country is, therefore,* hound, to be in very considerable
degree influenced by the course of the leading money markets of
Europe.
Speaking for myself, let me say that I cm under no illu
sion with respect to the function of the Reserve Banks in our
credit system, nor any with respect to the Federal Reserve Board's
position and power as the ultimate authority in the determination
of discount rates.
The Federal Reserve Act has invested the
Board with extensive powers, in the fixing of discount rates but
it has also charged the Board with the
responsibility of seeing
to it that rates are sc fixed as " to accommodate commerce and
business", thus indicating that the fixing of discount rates is
an exercise of economic and business judgment, not an arbitrary
choice.
No body of men in my opinion would be competent to shape
the policies or guide the destinies of our new banking system,
who did not realize that the determination of discount rates at
their proper levels was more a matter of the wise application
of economic law than of hasty or careless experimentation with
statute law; a question of the conditions affecting the demand
and supply of, loanable funds, present and prospective, as re
flected in the market for short term commercial loans. The Re
serve Banks will, therefore, show wisdom in recommending, and the
-1 9 -
658
Federal Reserve Board will show wisdom in sanctioning only such
rates as correctly interpret the trend of business and credit
conditions and needs, so as, in a genuine sense, " to accommo
date commerce and business".
For the Federal Reserve System
is not above or beyond economic law.
There is a magic in the Federal Reserve System but
it is no venture in financial alchemy.
It cannot make something
out of nothing, nor for any length of time, and except at the
cost of serious injury to,the movement of the country’s industry,
maintain rates that are out of line with the natural economic
trend.
It would be poor policy, at any time, to favor present
business at the expense of calculable future needs or require
ments, nor should accommodation be withheld from present busi
ness because of undue solicitude or fear for possible future
requirements. Such rates would not "accommodate".
In the one
case they would be too low, in the other too high; but the error
committed and its mischievous effects would usually not become
manifest until the results were well beyond control.
The Federal Reserve Banks as a whole might have
maintained rates at a very much lower .level than has been in
effect during the past year or more, but it is hard for me
■1203
•20-
658
to see what good purpose would have "been served by such
abnormally low rates.
As
I view it, the
chief results
would have probably been, first, to have given an unhealthful stimulation to business enterprise of doubtful validity,
possibly going sc far as to work a dangerous inflation of
credit and the launching of undertakings that would later
on have been caught an the grip of rising rates; end,
second, to have narrowed the margin of banking profit,
more especially in sections of the country which are for
the first time experiencing the levelling influence on
rates of a fluid credit system.
I need hardly point out that lower rates would
have borne hard on those of you who still follow the costly
practice of paying inordinately high rates of interest on
depositors' accounts.
It is a familiar fact that in many
parts of the country, banking competition, has raised the
rats of interest paid on savings accounts to a point where
industrial development is retarded and bankers' profits
threatened.
It is well to encourage thrift by suitable
inducements, out the matter is overdone when the induce
ment in the shape of interest goes beyond the rate war-
658
—21-
ranted by industrial conditions, and thereby diminishes the
incentive to individual investment and enterprise. And this
leads me to remark in passing that I believe that there must
be a readjustment in the interest paid to depositors to con
form to the reductions in the rates of interest and discount
which will result under the moderating influence of the new
banking conditions.
3. Absorption of redundant gold and checking of
Inflationary tendencies.
I am afraid that the great influence exerted by
the Federal Reserve Banks in steadying the movement and level
of rates is not generally appreciated at its full value and
significance.
The wise policy of conservatism and self-
restraint which has been pursued by the Reserve Banks as a
whole has given to the movement of industrial expansion
which has been under way for the past year, taking the
country by and large, a quality of health and solidity
that it would almost certainly not otherwise have possessed.
In this, the first substantial trial of the Federal Reserve
System's capacity for leadership, its success has been un
questionable. It has, ®o far as its situation permitted,
created an atmosphere conducive to healthy expansion, and
%
658
-22-
has used such influences as it could command to temper the
spirit of reckless adventure and prevent it from becoming
a menace to the country's welfare. The result has been that
the forward movement in industry which every part of the coun
try has been experiencing in greater or less degree, has been
one of the most substantial that the country has ever known.
How easily it might have been otherwise can be conjectured
by those who have not forgotten how often incipient indus
trial prosperity has been turned into misadventure and
col
lapse in the olden days, because of the lack of the guid
ing and steadying influence of such authoritative and com
petent leadership as the country now enjoys.
You will recall how frequently and confidently, up
to the very last moment preceding the passage of the Federal
Reserve Act, the prophecy was made that the new banking system
about
would bring./inflation, especially inflation of currency.
One
of the primary purposes of the Federal Reserve Act was to
provide a method of elastic note issue.
It is, of course,
obvious that there can be no elasticity of circulation with
out the possibility of expansion which may, if the manage
ment of note issues is in incompetent hands, lead to inflation.
r\
w ‘U
658
-23-
Discretion mu3t lodge somowhore, :.nd if it bo abu3ed,bad donssquences will result*
How carefully the new system has func
tioned in this respect,* and how prudently it has used its
issuing power to diminish, rather than aggravate any tend
ency toward inflation of credit is one of the most grati
fying evidences of the wisdom of our new banking law and
the ability of its managers.
This deserves to be made clear*
for there has been much misconception of the
policy which
has been pursued by the banks with respect to note issues.
The statement is sometimes made by persons who
have not taken the trouble to inform themselves, that there
has been a great expansion of the Federal reserve note cir
culation at a time and voider conditions when there was no
need of additional currency.
What are the facts ?
If you look at the Daily Statement of the Treasury
for May 13, 1916, you will find that $187,166,000 of Federal
reserve notes have been issued by the Federal Reserve Agents
or the Grovernment to the Federal Reserve Banks. The Federal
reserve notes are of course
obligations of the Government
as well as of the issuing banks and are issued by the Govern
ment to the banks and by them to the public. Before we can
determine what, if any, influence has been exerted by the
Federal
reserve
notes
issued
by
the
8
Government in augmenting the money supply of the country,
we need, of course, to know on what basis the banks have
issued the notes to the public, and also what portion of
the notes that have been issued by the Government to the
banks are held in the bank's vaults.
On may 13, 1916, it appears that $37,218,000 of
Federal reserve notes issued to the banks had not yet been
issued to the public, and of the $159,948,000 outstanding
and issued to the public, all but $9,567,000 had been issued
in exchange for gold.
That is to say, that except for
$9,567,000 of Federal reserve notes outstanding against which
the Government holds commercial paper for an equal amount
and the banks hold a gold reserve of 40$, there was for
every dollar of Federal reserve notes issued to the public
by the Reserve Banks a dollar of gold taken from the public
by the banks and deposited with the Federal Reserve Agents,
representing the Government.
In brief, to this extent the
Federal reserve note is tantamount to a gold certificate
or warehouse receipt for gold.
" ',2 0 8
- 25 -
A dollar of reserve money is, by usual computation,
estimated to "be capable of supporting a volume of credit in the
customary form of deposit liabilities, of four or five times
itself.
When, therefore, it is recalled that the Federal re
serve note is not legal tender and cannot therefore he counted
in the reserves of the national hanks, you can readily see how
the policy and method which the Federal Reserve Banks have pur
sued in the management of. their Federal reserve issues, so far
from inflating the bankable funds of the country, has actually
reduced them by a large amount.
In other words, of the vast
amount of $4-19/356/000 hi gold which the country received in
settlement of the international balance during the year 1915 /
and which, if allowed to accumulate in the reserves of the banks
would have threatened a serious unsettlement and disturbance
in our credit situation, 36 $ (or $150,381,000) has been drained
off and stored up in the keeping of the Federal Reserve Agents
until such time as changed conditions and the interests of com
merce and industry may require its use.
The note-issuing policy
pursued by the banks has thus had the twofold effect of actually
diminishing the tendency to inflation through substituting the
note in place of gold and, at the same time, has provided a defi
nite reservoir of gold which can be tapped without producing any
shock or anxiety when the inevitable demand begins for the re
turn to Europe of some considerable part., if not the whole, of
the gold whicfc necessity has obliged Europe to part with to us.
So far from being a source or cause of inflation, the very oppo
site is the case, and the country owes much to the salutary action
of the Federal reserve issues in mitigating the effects of the
gold influx.
■Whether vie could or how we would have dealt with the
problem of the increasing gold supply had we not fortunately had
the agency of the Federal Reserve Banks, may well be questioned;
but it is worthy of remark and careful consideration that although
a condition so extraordinary as thi3 was probably never contem
plated by the framers of the Federal Reserve Act, and therefore
no special provision made for it, nevertheless, so well conceived
was the general framework and machinery of the system that it was
«
found that it could be turned to useful account in meeting the
situation created by the presence of the redundant gold supplies.
4.
Commercial confidence.
I have reviewed, perhaps at what has seemed to you
tedious length, three distinct, important and difficult kinds of
service which the Federal reserve organization has rendered
in
658
- 27 -
the first year and a half of its existence - a period character
ized in its general aspects by much uncertainty and anxiety - in
order to show how the new hanking system is standing the test.
It
has met every requirement in the financing of the largest export
trade the country has ever enjoyed;
it has equalized and steadied
discount rates at a low level throughout every district of the
country and in this connection it has withstood the temptation to
utilize its vast resources and power to depress discount rates to
the point where both a dissipation of its resources and an unhealthful stimulus would result;
and,, thirdly, it has done much to check
the inflationary tendency threatened by the huge influx of gold.
I come now to a fourth matter which is in some respects
equal in importance to any of the others, if not of greater import
ance, because it has underlain each one of them guid has made pos
sible the definite and signal results which have been achieved.
I refer to the atmosphere of confidence that has been induced and
maintained from the very day and even
before the day of the open
ing of the Federal Reserve Banks, and in every section of the coun
try.
It is, of course, hard, not to say impossible, to estimate
the value of any element of business health and activity so intan
gible as confidence, and yet it is of the very essence and life of
the modern business system.
Business is largely a state of mind.
Business flourishes in the atmosphere of hope and the sun
shine of cheer; it is chilled and choked by the poisonous
vapors of fear and anxiety and is paralysed by the atmos
phere of despair.
The method of the Federal Reserve Sys
tem,, I trust you understand by this time, is the method of
hope and of encouragement.
It is this quality which dis
tinguishes the Federal reserve legislation from any other im
portant piece of legislation ever enacted by our Government
touching the fortunes of business.
It is this quality which
entitles it to be regarded in a very genuine and critical
sense as a product of constructive statesmanship.
It is
this quality which makes the advent of the Federal Reserve
System mark an epoch in the business life of America a.nd a
atep of incalculable length in the development of the new
relations which the statesmanship of the future will seek
to cultivate between the agencies of Government and the
agencies of business.
That it has thus far succeeded in this vital
function, the past year and a half bears eloquent testi
mony.
A more striking contrast of conditions than those
which confronted the country at the inception of the Federal
Reserve System, when business and financial chaos was im-
,* r$4i O
i'J
pending as a result of the outbreak of the European war,
and those which have obtained since the banks were set in
operation, can not be found.
Our international relations
during the year 1315 -were narked by several critical episodes
any one of which under ordinary conditions would have thrown
business into convulsion.'
Public opinion and feeling has on
several occasions been in a state of extreme tension-
VThen
we recall the Lusitania incident, the Arabic, Ancona> and Sus
sex, to say nothing of the Mexican tangle, we can readily under
stand why war at times seemea to many imminent, and to some a
certainty, and yet throughout it all the business pulse has
been strong and steady and firm.
There has been little of a
dramatic or sensational character to .record in our recent
business annals.
There have been moments when that sen
sitive barometer of business feeling, the stock market, ha3
registered some nervousness and hesitation, but nothing for
a moment comparable with the disturbance and shock following
threatened ruptures in our foreign relations bn former oc
casions, so unqualified has been the confidence that the
business community as a whole! has felt in the new banking
system.
’’Then President Cleveland, twenty years ago, sent
to Congress his message defining the position of this country
with respect to Great Britain's attitude on the Venezuela
boundary dispute, the leading markets of the country were
threatened with collapse.
When President Wilson delivered
his recent address to Congress with respect to the position
of our country on Germany's methods of submarine warfare,
though the situation was vastly more delicate and critical,
our leading markets showed little weakness and less anxiety,
and why?
Because there was confidence that, come what might,
a
we were possessed of/banking organization whose resources and
management gave ample guaranties of financial safety.
The
gratifying evidence thus given of the feeling of security which
our new banking system has inspired in the business community,
is one of its greatest achievements and most valuable assets,
For it may be laid down as axiomatic in modern finance that a
financial and banking system, to meet the ultimate test, must
not only be strong, but must also be generally believed
strong - and adequate to any need.
to be
That difficult test has
been successfully met.
Indeed, when we reflect upon the conditions of the
past year, the establishment of the Federal Reserve System
almost coincidently with the war seems almost to have been
providential.
Without the new system we should certainly
658
- 51 -
have "been floundering like a ship at sea without rudder or
compass to guide it; with it we have sailed like a wellballasted ship, steadily and securely.
And all this has
been accomplished with a very moderate, not to say insignif—
icent, amount of activity, as business activity is commonly
measured in these days, on the part of the Federal Reserve
Banks, thus showing that it is not the amount of business done
which measures the usefulness and effectiveness of the Reserve
Banks, but the character and the extent of the influence excerted by them, whatever the ways in which that influence may
be exerted.
With money rates unprecedentedly low, as they
have been during the past year and with the banks of the country
pretty generally in liberal supply with respect to loanable funds,
it is hard to see vhat good purpose could have been served by an
attempt on the part of the Reserve Banks to force the use of their
funds by demoralizing reductions of rates, even if they could
have succeeded, by
this means, in diverting business to them
selves.
I do not doubt that as the natural expansion of bus
iness grows up to the supply of credit facilities with which
we are now so richly blessed, the loaning power of the Reserve
Banks will be drawn upon in increasing degree, and that most,
if not all, of the Reserve Banks will have abundant opportunity
to engage in activity which will be at once useful to the com
munity and profitable to themselves.
But until this point
is reached, it would be shortsighted to complain because the
Reserve Banks, as a whole, have not been dividend-earning in
stitutions.
Activity is the law of being of any ordinary busi
ness concern, but the Reserve Banks are not ordinary business
concerns.
They have a very aacred place and function in the
country's credit system.
Profit is not their object, and not,
therefore, the test of their fitness.
Not the amount of bus
iness done., but the amount of good done, is the proper standard
by which to judge them.
But when this is said or admitted, it
should also be added by xvay of a warning word to those who would
wish to see the operations of the Federal Reserve Banks circucumscribed within narrow limits, simply in order to avoid the
effect of their competition with powerful member banks, that
the limited amount of commercial operations in which the ma
jority of the Reserve Banks have thus far engaged, is not for
a moment to be taken as indicating the range of their normal
activity.
There will, in time, be much business that these
ibanks will have to assist in order effectively to perform their
if**-,.
653
- 33 r
functions as regulating and governing banks, and while this
"business should not he undertaken from motives of profit, we
may confidently expect that it will, in the ordinary course,
yield returns that will easily pay the expenses of maintain
ing the Reserve Banks and meet their dividend requirements, and
thus satisfy the ordinary test of "business success along with
the other and more difficult tests; for let us not overlook
the fact that higher
and more difficult tests than axij which
the system has thus far had to meet may await it in the un
certain and troubled future toward which the whole commercial
world seems moving, as a result of the terrific disorganization
of industry, commerce, and finance which the gigantic struggle
now in progress in Europe will entail.
Econimic Readjustment After the War:
It has been predicted on the one hand, that the lead
ing countries of Europe will find themselves industrially and
financially so weakened as a result of the war that they will be
long in repairing the damage sustained by their industrial organieation, and will be, in consequence, a factor of diminished
importance in the sphere of international commerce.
The m©re
destruction of large percentages of their working populations
”*
±217
and the disability through injuries and disease, of other large
percentages, to say nothing of the destruction of vast amounts
of physical capital, it is suggested will result in such shrink
age of their productive power as to keep then busy at home for
a long tine in repairing waste and loss.
The crushing burdens
of taxation that will lie heavily upon the connerce and industry
of Europe are also pointed to as - factors, that will retard in
dustrial recovery.
Germany, which before the war occupied a
most formidable position in export trade and in. ocean carrying,
as a result of British domination of the sea, has been practically
shut out from her customary over-seas trade.
To what extent and
how soon, she 'will recover her former position is regarded as
highly problematical, and weakened competition in our markets
and some of the new markets in which we have recently been ac
quiring a foothold, is, in consequence expected.
Others, however, predict that the economic recovery
of Europe will be rapid, and that competition, both commercial
and industrial, among the leading nations, more intense than
has ever before been experienced, is to be expected soon after
the close of the war.
The animosities, rivalries, and am
bitions for commercial and industrial supremacy, which had
1318
658
- 35 much to dc with the making of the war, will., it is said, con
tinue and give to the period after the war much of the un
settled and unsettling character of war times-
Those who
take this view predict that an era of protracted and hitter
commercial warfare will follow the termination of the armed
conflict, and that the differences and scores x^hich were not
settled on the field of battle will he fought to a finish on
the field of commerce, and that neutral nations will inevi tably he drawn into the struggle.
Without undertaking to pass judgment upon predictions
of this character, I think it nevertheless well that we should
he alive to the contingencies which may he ahead, and I do not
hesitate to express my belief that Europe will give tc the
world an impressive exhibition of the recuperative powers of
modern industry even after such a costly and exhausting war
as has been in progress.
Stupendous as are the examples
that the past year and a half have given us of the destructive
agencies of civilization when turned to war, I believe we shall
get equally impressive examples at its close, of the construc
tive forces of m o d e m civildation when its energies and aspira
tions are turned to the healing work of peace.
War destroys,
•f
658
- 36 "but that is not all that it does-
Fortunately for a world in
which war is long likely to remain a persistent and recurring
fact, war "brings some industrial compensations, though the off
set to the losses and injuries
be far from complete.
War,
especially war of the kind which is going on in Europe and
touching to passionate intensity the vital impulses of great
communities of men, stiffens and steels their fibre and makes
them more capable to bear the hard and heavy burden of modern
industry, and. therefore will make them more formidable competi
tors, in time , of nationa which have not had to face the dis
cipline of war.
No one can begin to approximate how much the
industrial efficiency of the average man and woman in Europe
will be raised as a result of the experiences and lessons which
war has taught tham in unity of purpose and action, in organ
ization and efficiency, in economy and thrift, in industry, and
in devotion to duty.
These things will tell, and I believe
tell mightily, in the productive and competitive strength of
the larger European nations after the war.
Necessity has
already worked some wonderful transformations in the industrial
systems of the countries at war, and it is not unreasonable to
expect that the nations which emerge from the trenches will, man
for man and woman for woman, (for woman is clearly to play a role
Q
658
- 37 in the industrial economy of Europe in the future far more im
portant than she has in the past) come more near to realizing
their full productive capacity than ever "before.
This war has also taught lessons to the warring nac
tions which will not soon be forgotten or wasted, as to the
momentous effect which an efficient credit organization can exert
in maintaining a country's industry in a state of health and
activity and just as the European credit system has shown a capa
city to finance the costs of war which has far outrun the wildest
expectation, so it may be expected that it will show a new and
enormous power to meet the requirements of industrial recupera
tion.
Let us not, therefore, make the mistake of supposing
that it will be an industrially feeble and unambitious Europe
which will emerge from the war.
The history of modern commerce affords no parallel
to the situation which exists or may exist, and we can there
fore learn little from history as to what we may expect.
The
nearest approach is the long period of economic disturbance
following the close of the Napoleonic wars.
It took fully
fifteen years for the world of commerce and industry to work
out the needed readjustments and recover a normal equilibrium,
and the process was embittered and embarrassed by policies of
■f 9 0 - 1
, j l _ ■ ”-aa# i" ■<&
commercial reprisal and tariff wars, similar to those which
»
are
now being planned by the contending groups in the European
war.
Neutrality was no protection then, nor wall it be now.
Our commerce and industry pursued a troubled course from 1815
to I83 O, marked by a succession of alternating periods of fit
ful and feverish activity and industrial breakdowns.
The
process of readjustment which had to be gone through in order
to determine what the relative positions of the several nations
should be in the new commercial economy was a long and costly one
for each and all.
Uncertainty was everywhere.
To recognize
the possibility, not to say the probability of the recurrence
of something similar would seeij* to be the part of prudence forus, and the first step in intelligent preparation for it.
The
one thing which is certain in forecasting the future is the
uncertainty of the conditions writh which we shall be surrounded.
Let me add however, in order to relieve unnecessary
suspense, that I do not look for an immediate reaction in our
industrial situation at large as a result of the close of the
war.
But I do expect that some of the industries which have
been stimulated into frenzied activity by the forced draught
of evanescent wrar orders, may have their troubles.
Also I
-f < 1 )0 0 :
_L_■■ks',■'<»/<-y
think that there is much danger that their tfcoubles, unless
localized and controlled, may breed trouble, uncertainty, and
anx.iety for others.
as of prosperity.
There is a contagion of trouble as well
We know this from aad experience.
much, at least, may safely be 3 aid;
This
that our industry and com
merce are to travel uncertain and uncharted ways in the years
which are ahead, and uncertainty, I need not tell you, is the
great bane and foe of modern business.
To eliminate it where
we can, or to minimize it where we can not completely control
it, is our clear duty.
We shall not, therefore, if we are
wise, neglect to strengthen our defenses so as to make them
equal to any contingency with which we may be confronted-
And
this leads me, in conclusion, to say some frank words to the
State banks, whose cooperation should be forthcoming in order
to widen the base of our banking structure, to give the country
the fullest sense of safety and security.
5*
How are State banks meeting their test.
Speaking to ahconvention made up largely of State
bankers I should be remiss in my duty if I did not avail myself
of this opportunity to speak plainly to you.
You know that
658
-
ko
_
%
the Federal Reserve Act was purposed planned upon a "broad
and generous scale in order that every "bank in the country,
whether State or National, doing a commercial "banking business
in safe and legitimate ways, might secure for itself and its
customers the advantages and protection of the Federal Reserve
and at the same time contribute its quota of strength to it.
The State banks surpass in number the National banks and repre
sent a substantial part of the commercial banking power of the
nation.
To what extent the proportion has declined since the
establishment of the Federal Reserve System can not be approxi
mated with accuracy but it is a fact that the National banking
system has since the establishment of the Federal Reserve Sys
tem shown an accelerated rate of growth and a greater capacity
for. growth than State banking during the same period, the in
crease in the deposits of the National banks having been esti
mated to be three or four times as great as those of the State
Banks since the inauguration of the new System.
T7hat the
relative growth of member and non-member banks will be in the
future, I shall not undertake to prophesy but as logg as there
is a considerable portion of the banking power of the nation or
ganized as State banks and which is eligible for membership in
the Federal Reserve System and has not ) oined, the system will
not have attained its fullest strength and its widest field of
usefulness.
658
-4 1 -
VJhy are you State banks not coining in to the new
system ?
The provisions of the law respecting State bank mem
bers are as liberal as could well be desired, and the regula
tions which the Federal Reserve Bo.„rd has laid down on this
subject are even more liberal.
Those of you who have read
the Act and the Regulations of the Board will, I believe,
find no reasonable ground of complaint.
You will find few
restrictions upon your customary banking methods.
The Board
has even gone so far as to provide a way by ’which any State
bank becoming a
member bank may withdraw from the system
in order that you need not be deterred by the feeling that
membership means an irrevocable choice.
The attitude of
the Federal Reserve Board has been founded in the conviction
that our new banking system should be as broad raid as strong
and as capable, as the financial condition of the country will
support and the limitations of the Reserve Act will permit.
It is almost a year now since this Board issued
its regulations concerning the admission of State banks.
Thirty-four banks have joined.
The strong conviction which
the business community in every part of the land has formed
of the benefits of the new system require that it should be
known why the growth of State bank membership has been sc slow.
658
-4 2 -
Are any of you holding back because of dissatisfaction with the
provisions of the Federal Reserve Act or with its administration ?
The Federal Reserve Act and the Federal Reserve System are here
to stay.
They have won the sanction of public opinion and are
regarded as the essential bulwark of our financial safety.
As
to the administration of the Act and of the twelve Reserve Bunks,
little but good has been heard. But if the State banks are hold
ing back because of dissatisfaction with the administration of
the law or the banks, they should make it known in order that
the defects may be remedied, and the country given the full
advantage of a banking sjrstem carried to the highest point of
strength and efficiency.
Coming to another reason, I have sometimes heard it
suggested that financial conditions have so changed that there
is no longer need of the kind of protection and security which
the Federal Reserve System was designed to provide. It must
be admitted that the financial situation during the past year
has been so exceptionally easy that it might well have be
gotten in the minds of those who are not in the habit of look
ing beneath the surface of things, the idea that financial
strain and
convulsion is a thing of the past.
They are likely
658
-4 3 to experience some surprises,
I have already given my rea
sons for expecting that the years which are ahead and which
will reap the consequences of the financial disorganization
and demoralization growing out of the great war, will he years
of uncertainty and disturbance for us in common with the rest
of the world; years filled with anxiety, and requiring for
the good management and the protection of our national interests,
the guidance and support of the Federal Reserve System. What
ever other mistakes we make, let us not deceive ourselves on
this point, and be lulled into a blinding passivity; for when
trouble comes, as sooner or later it will and State banks in
overwhelming numbers run to cover under the shelter of the
Federal Reserve Banks, they may find some difficulty in get
ting in as quickly as they would like.
There is also a feeling abroad in some parts
of the country that in some mysterious way the Federal Reserve
System, with the membership of the Ration,al banks', has pro
duced a situation in 'which the beneficent effects of the new
banking system, like the rains tof heaven which fallalike upon
the just and the unjust, will be so inevitably and widely
diffused that non-member banks, no less than member banks,
will reap the full advantages.
Let me say very frankly that
I believe there is some truth in this - yes, much truth but not so much as is frequently assumed.
—rw r w If
To the extent that the success and effectiveness-.,
of the new system will depend upon the feeling of security
that it inspires - in ether words, to the extent that the
success of the system depends upon what may be entitled its
psychological reserve - it is no doubt true that all the
banks, irrespective of their connection with the new system,
will participate
in the result. But it may readily happen,
and it will probably happen, that from time to time - no
one can say in the face of the critical years ~hat are ahead
of us how frequently these times will occur - the needs which
the community will have of the Reserve Banks will call for
more than psychological reserves and will at times cut deeply
into their gold reserves, and then will it become
clear
that the strength of the system is measured also by the cash
that it holds in hand. The State .bank, therefore, which con
ducts a banking, business that qualifies it for membership in
the system under the liberal conditions laid down by tho Fed
eral Reserve Board, and which sustains relations with the
business community of the kind that give rise to financial
difficulties and embarrassments of the sort which have called
forth the establishment of the Reserve Banks as a means of
protecting the community, are taking the responsibility for
■f: < 1 ^ 0
*o
658
-45-
themselves and, what is of far more serious consequence, for
the communities of customers which they serve, of keeping
the new system, from becoming in the fullest sense an American
system, equal to any demands that may be made upon it.
You are the bankers of a community whicja is
served mostly by State banks.
Your State has extensive agri
cultural, manufacturing and merchandising interests.
are precious to your people.
They
Their condition makes or mars
your prosperity and your condition may make or mar theirs.
I see no good reason why the people of Missouri, or Arkansas,
or Mississippi, should not enjoy in all circumstances the
same sense of security as is enjoyed by the farmer, the manu
facturer, and the merchant in States or sections of the
country which are served preponderantly by National banks.
I believe the welfare and security of the Missouri fanner,
merchant, or manufacturer was just as much in the mind of
Congress when it enacted the Federal Reserve Act as that of
manufacturer, merchant, or farmer of Massachusetts or Conn
ecticut.
He is entitled to all the good that can be reaped
from the new banking system and he is entitled to know it,
if his existing banking connections do not secure him the
fullest end freest access to it.
1
658
-4 6 The Reserve Bank affords an ever ready means by which
good commercial paper can, at a moment1^ notice, on presentation
at the counters of the Federal Reserve Bank, be turned into
either credit or currency.
No such thing as a currency famine
can overtake the customer of a bank that, by reason of its mem
bership in the Federal Reserve System, has the right and ability
to go to that bank and get gold, credit or currency.
Non-member
banks may get it as a matter of favor, but I believe that people
as they come to understand these matters more fully, will see
the difference between dealing with a bank that, as a matter of
right and of course, can go to a Federal Reserve Bank for as
sistance in the certain knowledge that it will be forthcoming,
and those banks which, if they get such assistance at all,
will get it indirectly and as a matter of favor „nd of public
spirited generosity on the part of the member bc.nks and of
the Reserve Banks.
In matters of such vital concern to its
industry and agriculture, no community can afford, or will
be willing, to pin its faith to bonks which are on the out
side of the Federal Reserve System.
Those of you who need a more personal and cogent
reason for becoming member bonks will soon find it, I believe
±
658
-4 7 -
when the plan which has been devised for the clearing and
collection of checks has been put into operation by the Fed
eral Reserve Banks.
The Federal Reserve Bank of St.Louis
will soon issue a circular giving complete information
and I am confident that the plan will have been in opera
tion but a short time before many non-member banks will
realize the necessity of joining the Federal Reserve System
in order to participate in its new collection plan.
The plan is well conceived.
The Federal Reserve
B~nks will extend unsurpassed collection facilities to such
of their members as choose to avail themselves of them,
but the system is optional.
No member bank will be obliged
to clear through its Federal Reserve Bank.
The only element
of compulsion is that every bank, whether member or non-member,
will be obliged to pe.y without deduction checks drown upon
it -nd presented at its counter for payment by the Federal
Reserve Bank or its representative, either in acceptable ex
change or in lawful money.
The plan is reasonable: many
letters that are coming to the Federal Reserve Board from
those who have been the victims of excessive exchange charges
prove this.
The plan is al3o practicable and is going to
2
3
0
-« <rv
f'i
658
-4 8 bo effective : this is proved by the objections that aro
being urged against the plan by those banks that are now
taking tribute from the commerce and business of the country
in the shape of unreasonable exchange charges.
It has been
estimated that as soon as the plan has been put into opera
tion checks upon at least fifteen thousand banks, National
banks, State bank3,ond trust companies, throughout the United
States can be handled at par through Federal Reserve Banks,
subject to a small service charge.
the rule.
Par collections will be
State banks whose checks cannot be collected at
par will be a 3mall and rapidly diminishing minority and, as
they will find it difficult to retain much good business when
checks drawn upon them are at a discount while checks drawn
upon the majority of bonks can circulate at par, the day is
near at hand when checks upon practically all banks can be
handled at par by Federal Reserve Bonks.
If the reasons I have advanced for State bank mem
bership in the Federal Reserve System are sound, as I believe
you will, on sober reflection conclude they are, why, then,
I repeat, are you State bankers hesitating and waiting ?
658
-4 9 -
I asked this question the other day of one of the largest hankers
in this district
and his answer as ./'mostof them don’t know. They
can’t tell you.
But you will get them inquickly enough when
trouble comes."
I heave spoken to little effect if the logic of
my words does not say to you, "Don’t wait ’till trouble comes., but
make the assurance of the new banking system for yourselves and
%
those you serve, doubly secure by coming in now, and doing your
part in giving to this country of ours a banking system worthy
of its name and worthy of its future."
to fail.
To falter is, therefore,
To fail in this vital test, at this vital time, is
unbusinesslike, is ungenerous; is, therefore, un-American and
unpatriotic.
A. C. M*
5/19/16
-f O
660
SUGGESTED FORM OE REPIY TO INQUIRIES RELATIVE
TO THE NEW CLEARING AND COLLECTION PLAN
(Prepared by Mr. Harding)
The check clearing and collection plan which has been
formulated by the Federal Reserve Board is not compulsory
upon any bank as far as the use of facilities to be pro
vided is concerned.
Member banks, as long as they comply
with the statutory requirements, may continue to carry ac
counts with their approved reserve agents and with other
national banks to whom they may send items for collection
and from whom they may receive, for similar purposes,
checks drawn upon themselves or upon other banks.
They
will, however, be required to pay without deduction, checks
drawn upon themselves and presented at their own counters
for payment.
Remittance of such checks by the Federal Re
serve Bank of their district through the mail will be con
strued as presentation at their own counters and they must
settle with the Federal Reserve Bank for such checks ,
either by checks upon other banks or by remittance of lawful
.<1
660
money or Federal Reserve notes at the expense of the Fed
eral Reserve Bank,
Checks drawn upon a member bank which
have been received by the Federal Reserve Bank will not be
charged against its reserve account until sufficient time
has elapsed for the checks to have reached the member bank
and for returns to have been received in due course by the
Federal Reserve Bank.
The Federal Reserve Board’s clearing system provides
that a small service charge, based upon the number of items
handled, will be made at stated intervals against such
banks as send to the Federal Reserve Bank checks on other
banks for collection and credit;
but it follows that no
portion of this charge can be assessed against any bank un
less it should elect to avail itself of the facilities of
fered.
Federal Reserve Banks will handle, besides checks
drawn on member banks, checks on such state banks as can be
collected at par, and national banks desiring to handle for
a Federal Reserve Bank checks drawn on state banks, will be
given the preference.
During crop moving periods it is
6 60
-3-
thought that this will he a distinct advantage to member
banks.
The Board has no disposition to deprive member banks
of any income that they may have been in the habit of re
ceiving from the collection of drafts or from the purchase
or discount of bills of exchange, and so there should be
no diminution in the customary profits of member banks
from such sources.
The Federal Reserve Board has received many letters
in regard to the plan, a great number of which are com
mendatory, and it appears from those of opposite tenor that
the objections raised are based upon an apprehension that
profits will be decreased and upon the feeling that the
plan will prove to be effective.
It is estimated that as
soon as the new clearing system is put into operation checks
upon about 15,000 national banks, state banks and trust
companies throughout the United States can be handled by
the Federal Reserve Banks at par, subject to the small
service charge above referred to;
and as a minority of the
1.256
#
•
660
-4-
banks will find it difficult to retain much of their good
business when checks drawn upon them are at a discount while
checks drawn upon the majority of banks can circulate at
par, it is thought that in the near future checks upon
practically all banks throughout the United States can be
handled at par by Federal Reserve Banks.
Many banks have
found it advisable hitherto to concentrate their available
funds by maintaining balances with a number of correspond
ents for exchange purposes, or in order to control checks
drawn upon themselves.
After November 16, 1917, no bank
balances will be available as reserve for national banks
except balances in Federal Reserve Banks, and therefore
*
after that time any necessity to maintain non-reserve
balances with correspondents, either for exchange purposes
or in order to obtain collection facilities, would be deemed
in many cases a great hardship.
It is thought that in
numerous instances banks will find it expedient to concen
trate their balances and to close many of the accounts which
they now carrj* with other banks, and that a system which
will enable them to send all of their checks on other banks
660
-5-
to Federal Reserve Banks for exchange purposes or as an
offset against checks on themselves forwarded by the Fed
eral Reserve Bank, will, in course of time, come to he
appreciated as a convenience and the release of funds
heretofore tied up in accounts carried with other hanks
and their employment at higher rates of interest in com
mercial loans, should offset to a great degree the pro
spective loss of exchange profits which is at the present
time looked upon with apprehension by some of the banks.
■*
WPGH-RRB-5/19/16.
W. P. 6 . HARDING, GOVERNOR
PAU L M. WARBURG, VICE GOVERNOR
FREDERIC A. DELANO
ADOLPH C. M ILLER
CHARLES S. HAMLIN
EX-OFFICIO MEMBERS
W ILLIAM 6 . McADOC
SECRETARY OF THE TREASURY
CHAIRMAN
JOHN SKELTON W ILLIAM S
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE B O A R D
H. PARKER W IL L IS . SECRETARY
SHERMAN P. ALLE N , ASST. SECRETARY
AND FISCAL AGENT
W A S H IN G T O N
ADDRESS REPLY TO
FEDERAL RESERVE BOARD
665,
May 24, 1916.
Dear Sir:
For your information I beg to enclose copy of order
entered by the Board, in the matter of the petition of certain
banks in Wisconsin for change in the geographical limits of
Districts Nos. 7 and 9.
The Board has given careful consideration to the
views presented and has reached the conclusion that it would
not be justified in making any alterations at this time.
If future developments should, indicate any neces
sity for such change the Board will, at a later date, give
consideration to the matter upon the application of banks
desiring to be transferred.
The Board, however, is very
hopeful that the results under the new clearing system will
make a transfer unnecessary.
Attention is particularly called to the fact
that if the Board had granted the petition as filed, those
bsinks located in that portion of the Minneapolis District em
braced within the upper peninsula of Michigan would have been
isolated and cut off from the rest of the District. This fact
should be taken into consideration if, at a future date, an
amended'petition is filed for modification of the district
lines.
Very truly yours,
Vice
Enclosure.
Governor.
■n
666.
IN THE MATTER OP THE PETITION OF CERTAIN BANKS IN WISCONSIN
FOR MODIFICATION OF DISTRICTS NOS. 7 AND 9.
Upon consideration of the petition of certain banks in
Wisconsin that the geographical limits of Districts Nos. 7 and 9
be modified ao as to include in District No. 7 a part of the ter
ritory now included in District No. 9, and
After a full investigation of the matter and in view
of the fact that the petition if granted would have resulted in
isolating and disconnecting the upper peninsula of Michigan
though leaving it in the Minneapolis District, the Federal Re
serve Board has arrived at the conclusion that there is no pre
sent necessity for any change in the geographical limits of the
said Districts Nos. 7 and 9 at this time.
It is ordered that said petition be dismissed without
prejudice to the rightsof the signers to file an amended petition
at a later date.
5/24/16.
o o q
IN THE MATTER OF THE PETITION OF CERTAIN BANKS IN WISCONSIN
FOR MODIFICATION OF DISTRICTS NOS- 7 AND 9,
Upon consideration of the petition of certain banks,
in Wisconsin that the geographical limits of Districts Nos. 7
suid 9 be modified so as to include in District No. 7 a part
of the territory now included in District No. 9, and
After a full investigation of the matter the Federal
Reserve Board has arrived at the -conclusion that there is.no
present necessity for any change in the geographicsil limits of
the said Districts Nos. 7 and 9 at this time.
It is ordered that said petition be dismissed with
out prejudice to the rights of the signors to file an amended
petition at a later date.
5/25 A 6
'IP*
W. F. 8. HARDIN6. 80VBBB0B
PAUL M. WARBUN8. VICE SOVIRHOR
FREDERIC A. DELANO
ADOLPH C. MILLER
CHARLES S . j ! ^ y i
EX-OFFICIO M IM IIM
WILLIAM 8. NCADOO
SRCRRTARY OF THB TRR ABIIRY
CH AIBH AN
JOHN SKELTON WILLIAHS
COMPTROLLER O F THE CUBBBBCV
FEDERAL RESERVE B O A R D
H. PARKER WILLIS. SRCRRTART
SHERMAN P. ALLEN. ASST.SECRETARY
AND FISCAL AORRT
WASHINGTON
May 24, 1916.
Mr. J. Z. Miller. jr..
Governor, Federal Reserve Bank,
Kansas City, Mo,
My de'ar Mr. Miller:
In answer to your letter cf May 19th it is not the
thought of the Comm.'.ttoe oh Clearing el the board to take up
at this time the question of charges which member hanks are
to make, against their patrons and, therefore, the matter has
not been discussed vy the Board.
Gu:* thought was that we
should first get the matter of par collections working, and
.
then we could see what further it was necessary to do.
It is conceivable, for example, that a member bank
mig^t pay only lil per item to get its checks collected and
be Obliged in addition to allow enough time for the collec
tion to be effected before it could draw on the fund, and
then turn around and charge its patrbns an exorbitant charge,
but Z think this is rather Unlikely;
As you very well know,.
the &igh exchange charges in the past by country banks have
been made by country banks against the large city banks, who
sent them the items, and this .system would never have been
effective if there had not been an arrangement, or community of
interest, between the' country bank and its city -bank correspon
dent.
1242
667,
- 2 -
In the big cities it is true that the city banks have
followed the custom of charging exchange on out of 'town items,
but
out.
wq
believe that competition is pretty likely to rub this
At any rate, it seems to Mr. Harding and mysglf that
we had better do one thing at a time and see what happens to
collection charges.
So far as the service charge to be made
by the Federal Reserve Bank is concerned, we are perfectly
willing that it should be li^ per item, and we do not object
to 2^ per item to start with in Districts like San Francisco
and Dallas.
Perhaps after a few months’trial a different
basis will be found desirable, one possibly based on gross
amount as well as on items.
Yours very truly,
F. •
DELflr?4
Vice Governor.
W. P. G. HARDING. GOVERNOR
PAU L M. WARBURG. VICE GOVERNOR
FREDERIC A. DELANO
ADOLPH C. M ILLER
CHARLES S. HAMLIN
Ex -O ffic io Members
W ILLIAM G. McADOC
SECRETARY OF THE TREASURY
CHAIRMAN
JOHN SKELTON W ILLIAM S
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE G O A R D
H. PARKER W IL L IS . SECRETARY
SHERMAN I V A f- U p N . ASST. SECRETARY
WASHINGTON
ADDRESS REPLY TO
FEDERAL RESERVE BOARD
AND KfecfcO AlSEN T
Mav 23, 1916.
Mr. J. B. McDougal,
Governor, Federal Reserve Bank,
Chicago, 111.
My dear Mr. McDougal:
Answering latter signed by Mr. McKay
wider date ol
May 15th, as you have already been informed, the Federal Re
serve Board is in general accord with the resolutions adopted
at the Transit Managers’ meeting as to the matter of details.
This is true, generally speaking pf all the resolutions with the
exception of that in respect to developing the clearing opera•tion in three stages instead oi one.
After hearing from all of
the Federal Reserve Banks the Board concluded, as per our tele
gram of May 21, to direct the starting of the elfcaring system
generally on Saturday, July 15th; thirty days later than the
date set forth in our Circular of May 1st.
There are a few
matters, however, to which you have specially called the atten
tion of the Board and these, after some discussion yesterday
were referred to the Board’s committee on clearing.
The first subject is that of par lists of non-member
banks for each District, which is touched upon in Topic No. 6.
Our committee entirely approves the conclusions arrived at by
the Transit Managers and will be very glad to cooperate in any
way it is desired in having lists printed by the Government
668
- 2
Printing Office for the use of the member banks.
.
In this con
nection, however, we want to call attention to the fact that
it is important that the committee having this matter in charge
shall send us "copy1' and “form" showing us exactly the style
which is to be followed, and requisition stating the number
of copies desired.
With reference to your Topic Ho. 10, entitled, "Penal
ties for Encroachment upon Reserves", the Board sees no objec
tion to the rule suggested by the Transit Managers.
Topic No. 11:
Analysis of Per Item Cost:
We see
no objection to this basis of analysis.
There are one or two other topics not specifically
mentioned in your letter to which the committee would call
attention.
Topic No. 3, entitled, "Sorting of Items by Member
Banks", the resolution of the Transit Managers requires all
member banks to sort their items in accordance with the time
schedule.
It appears to us this is entirely proper with
banks of considerable size, but would be burdensome with small
banks.
In deciding what you should do in a matter of this
kind we think you should certainly not be more exacting than
large city banks have heretofore been in their requirements
upon country correspondents.
- Indeed this is a rule which
might, we think, be based on the number of items sent.
i OJ.5
. 3 .
668.
Topic No. 9, entitled, "Statements of Reserve Re
quirements from Member Banks."
The resolution asks that a
statement be required from member' banks at least once a month,
showing the average reserve requirement for the preceding
month.
It is obviously impossible for a member bank to fig
ure the averagq reserve requirement unless it tabulates the
daily net demand and time deposits and from the sum of these
calculates the average.
Asking, for the average will result
in many cases in getting simply a shrewd guess as to what that
average really is.
It appears to us that the way to get this
information accurately with the least labor on the part of the
banks is to ask the banks to give you, either weekly or monthly,
a statement showing their daily demand and time deposits, from
which a clerk with an adding machine can quickly determine the
average.
The comit tee offers this simply as a suggestion
which should have your consideration, especially in view of
the fact that three of the Reserve Districts are now requiring
such statements from their members.
Topic No. 12, "Method of Applying service charge to
number of items."
The Transit Managers recommended a uni
form charge not exceeding
per item.
We understand, how
ever, that in the Dallas and San Francisco Districts the Fed
eral Reserve Banks believe that they must charge at least 2<ji
as compensation.
Hie Federal Reserve Board’s coranittee
•)1 O "'I !
668.
4
believes that, while it Is desirable that the charges should
bo as nearly alike as possible, it is not essential that they
should be identical*
It has occurred to our committee that
you might like to determine that this charge of lg# might bo
split ao as to divide the compensation in some cases.
for example, a bank in the Seventh District
As
might send Chicago
a lot of items on the Cleveland District, or it might send them
direct to Cleveland.
If the Cleveland Bank is paid the whole
12^ per item in each case, there is nothing left for the Chicago
Bank for its
service.
If, in this case, the Chicago Bank
should receive lir^ per item and pay the Cleveland Bank some
thing less than lg$ for collecting items, it would receive
some compensation for its share in the service.
It may be
thought cumbersome and unnecessary to do this and the Board’s
committee does not.care to press the point.
After experience of several months it may be deter
mined best to put.the charge on some different basis or to
make allowance for the gross total of items as well as their
number.
Yours very truly,
F. A. DELANO
’.T: •
•
*
)
) Committee
W. P. G. HARDING ) on Clearing.
A copy sent to. the Governors of each Federal Reserve Bank.
Ex -O ff ic io MEMBERS
W. P. G. HARDING. GOVERNOR
PAUL M. WARBURG. VICE GOVERNOR
FREDERIC A. DELANO
ADOLPH C. MILLER
CHARLES S. HAMLIN
WILLIAM G. MCADOC
s e c r e t a r y o p the
Tr e a s u r y
C h a ir m a n
JOHN SKELTON WILLIAMS
FEDERAL RESERVE B O A R D
COMPTROLLER OF THE CURRENCY
H. PARKER WILLIS. SECRETARY
SHERMAN P. ALLEN. ASST. SECRETARY
A N D g ^ U g . A6ENT
WASHINGTON
ADDRESS REPLY TO
FEDERAL RESERVE BOARD
May 26, 19X6.
Mr. D. C. Wills,
Federal Reserve Agent,
Cleveland, Ohio.
My dear Mr. Wills:
The point raised in your letter of $ay 12th, reading
as followte:
"Will the country bank keeping a single account
be permitted to count the full balance in that account
without deduction, as reserve, provided it carries on
the books of the Federal Reserve Bank a net collected
balance equal to its minimum reserve requirement?"
is a matter which we have not as yq>t dealt with.
It is really
a matter for the Comptroller of the Currency to decide and we
have not wished to urge a change in the Comptroller's ruling.
As far as the Federal Reserve Board is concerned, it can only
deal with the minimum reserve requirements in the Reserve Bank.
The optional reserve and the reserves in the member banks* own
vaults is a matter between the member bAnk and the Comptroller.
*
If the Comptroller continues to allow member banks to count
a|i reserve items which have beei^ put in the mail for collection
that ii his lookout.
If he allows banks to more than offset
items due to other banks, with‘items due from other banks, but
not collected, that is beyond the control of the Federal Re
serve Board.
672.
-
2 **
My own view, furthermore, is that while' we must he
conservative we must take our steps one at a time, and that
it would he a groat mistake, simultaneously with the adoption
of the clearing plan, to cause the adoption of a harsh ruling
by the Comptroller as to how member banks* records of reserves
are to be interpreted.
This is a statement which we are not
"shouting from the housetop", nor one which we would include in
any circular, but I believe that it has an important bearing in
the successful working out of the clearing plan.
Since dictating the above I find this matter stated
rather well in the circular of the San Francisco Bank to its
member banks, one paragraph of which reads sis follows:
"While the proceeds may not be counted as required
reserve deposits (i.e., the amount required by the Fed
eral Reserve Act to be carried unconditionally .on deposit
with Federal Reserve feahk), yet, because credited by Fed
eral Reserve Bank, they may be counted as part of the
optional roseryes (i.6., the amount to be carried either
ixk member bank‘e own vaults, with Federal Reserve Bank
or with other approved reserve agents)."
.Yours Very truly,
Vice Governor.
ADDRESS OR W. P. G. HARDING,
MEMBER OR 'THE FEDERAL RESERVE
BOARD, BEFORE THE ARUM I SOCIETY
OF THE UNIVERSITY OF ALABAMA,
AT TUSCALOOSA, TUESDAY MORNING,
MAY SO, 1916,
RELEASED TO AFTERNOON PAPERS, MAY 30th.
EFFICIENCY AND INDUSTRIAL PREPAREDNESS.
We are celebrating the one-hundredth anniversary
of the historic city of Tuscaloosa and the eightyfifth annual commencement of our great University. Al
though upon such an occasion our thoughts naturally
take a retrospective turn, I shall not in my remarks
dwell upon the past, rich as it is with lessons of its
trials and triumphs, nor will I pose as a prophet and
attempt to rent the veil of the distant future.
I
shall speak instead of the present and of that im
mediate future which lies within our horizon, and which
we can make \?hat we will.
(I.)
LESSONS OF THE EUROPEAN WAR.
We are living in a most critical period of the
1250
- 2 -
world's history, a stupendous era, full of opportunity
and fraught with gra^e responsibility.
The frightful
holocaust on thh other side of the Atlantic, with its
appalling sacrifice of human life, with its enormous waste
and with its pandemonium of calamity and woe, has
aroused in the hearts of the people of this country
mingled feelings of horror and of pity, but also it has
instilled in our minds a better and higher appreciation
of our duty to ourselves, to our country and the world.
Ho longer are we lulled into a false sense of security
because of our splendid isolation, no longer do we feel
that we enjoy permanent immunity because of the three
thousand miles of ocean waves that separate us from the
shores of Europe;
but we have as a nation come to
realize that our surest guaranty of peace lies in pre
paredness for war.
The first steps for military and
naval preparedness have already been taken, and because
of this we are confident that we shall escape any part
of the tragedy now being enacted on the three continents
of the old world.
This confidence is intensified be
cause of the calm judgment and consummate skill of the
President of the United States, Woodrow Wilson, who has
fOKI
-3-
so successfully handled a grave, international crisis,
maintaining friendly relations, while preserving our
national honor and dignity.
It is not necessary, there
fore, to discuss at length at this time and place, pre
paredness from a military sense, but it is well that we
should consider it from a commercial and industrial
standpoint.
f II.)
EFFECT OF WAS UPON AMERICAN COMMERCE.
Out of the misfortunes of others has come to a
great extent the marvelous prosperity with which this
country is blessed today.
The temporary depression in
the United States which followed immediately the out
break of the war and which was due to the sudden and com
plete collapse of credits and to the interruption of the
accustomed means of transportation and communication
throughout the world, was followed by a speedy readjust
ment which brought with it from the warring nations and
from non-combatant countries ?/hose trade had been prin
cipally with the powers at war, millions upon millions
of dollars worth of orders, not only for munitions but
also for the ordinary necessities of life, v/hich have
been pouring in upon this country so that it has been
-4 -
enriched, according to the estimate of some authorities,
to the extent of about three billions of dollars.
This
golden flood has fairly deluged some of the states to the
north and west of us.
Alabama and her sister states of
the South, while feeling to some extent the impetus of
better times, have not received their fair proportion.
fill.)
POSITION OP THE SOUIHo
The South, since that day, back in 1881, when we
members of that Glass made our final bows upon the ros
trum in Woods' Hall, has made great progress in all lines
of industry, in agriculture, in manufacturing, in mining,
in banking and in commercial pursuits, as may be exempli
fied by the statement that the banking power of the
Southern states is now greater than that of the entire
United States at that remote day.
But our section, never
theless, has not yet become highly specialized in the
arts and sciences, and in manufacturing, but is still es
sentially an agricultural region and still has cotton as
its principal money crop.
Because of the inability of
the central powers to import cotton on account of the
rigid blockade which is being maintained, the South has,
during the past year, been deprived of a market for nearly
one-fourth of its export crop, so that neither its
-5 -
manufacturers nor its farmers have reaped that measure
of profit which has come to the same classes in other
sections.
The South is, however, an important part of
the United States, and is interested in common with all
other sections, in the maintenance of national pros
perity.
Already there are some indications that a
wearied Europe is beginning to turn its thoughts toward
peace, and perhaps it may be the mission of our Southern
bom President to poipt out the way.
(IV.) AFTERMATH OE THE WAR.
Restoration of peace will necessarily bring about
important changes in the world’s trade and just what
these changes will be and how they will affect business
conditions in this county, are problems which are being
studied carefully by publicists and business men.
These
are vital questions here in the South as in other parts
of the country, although we may not be as directly af
fected as other sections for the reason that a smaller
part of our business has come from foreign countries or
has been connected with war material.
Wo should, how
ever, stand ready to support the Government in any
measures that it may be necessary to adopt in order to
retain the legitimate foreign trade that we have already
\254
-6-
secured, to extend still further our business intercourse
with South American countries, besides maintaining a
proper balance in our trade relations with the nations
%
now at.war« American bankers are permitted under the
Federal Reserve Act to establish branches in foreign
countries qnd can thereby facilitate transactions involv
ing the importation or exportation of goods, and it is
practically certain that a law will soon be on our
statute books creating a tariff commission, whose duty
will be to make a close study of changing conditions and
to recommend from time to time such modifications of
our present tariff laws as may be advisable.
I do not
speak authoritatively, but I hope that as a measure of
commercial preparedness, steps will be taken to encourage
the manufacture of dye stuffs in this country, to pro
tect American firms against foreign dumping and to pro
vide heavy penalties for foreign concerns engaged in un
fair competition in the United States.
American merchants
and manufacturers seeking to compete with those of other
nations in the markets of the world should be permitted
to engage in the contest on equal terms with their com- .
petitors, and we should, therefore, favor some arrangement
<! O K K
-7-
that will enable American exporters to secure foreign
trade in competition with the cartels and combinations
of Germany and other countries.
•
(V. ) AMERICA! MERCHANT MARINE.
A serious drawback to the development of our foreign
trade is the utter inadequacy of our American Merchant
Marine.
The South has felt this perhaps as keenly as
any other section of the country.
We have been handicapped
very greatly in exporting cotton by lack of ship room
and by abnormally high ocean freights.
Rates to Liver
pool on cotton have for several months past, frequently
ruled as high as $>15*00 per bale, or
Z</
per pound, or
about 10 times the normal rate, and this excess has, to
a great extent, come out of the pockets of the Southern
farmer.
American ship yards have been very busy for
the past year or more, as private capital has been
attracted to shipping by the unusual profits obtainable,
but in normal times this activity cannot be expected to
cont inue.
Our wage scales are much higher than those of foreign
countries, whose shipping is also, in many cases, subsi
dized, and, in order to establish an American Merchant
Marine which can be used in the carrying trade in time
of peace and as a naval auxiliary in time of war,
Government intervention and aid seems necessary.
The
shipping bill passed the House of Representatives a
few days ago, with the support of practically all the
Southern members, and will, in all probability, pass
the Senate and become a law before the adjournment of
Congress.
(VI.)
RURAL CREDITS.
Another measure of supreme importance to the South
is now in conference, — the rural credits bill.
The
South for a great many years has labored under the curse .
of absentee landlordism and it has suffered from the
evils of the tenant farming system.
Hardly more than a
•i
tithe of its productive capacity has been utilized, for
lack of both capital and labor.
With the exception of
Texas, the Southern states have not attracted their
proper share of immigration, either foreign or domestic.
Too many of our rural population have found it impossible
to make any substantial headway, and finding themselves
year after year lacking all of the lunuries and many of
the necessities of life, have lost ambition and have
1257
-9-
settled down to breathe the sodden atmosphere of a hope
less and aimless existence.
The rural credits act will
open the way for the organization of national farm loan
associations which, in cooperation with the twelve
Federal land banks to be 'established, will make loans
on farm lands on long time;
payments being amortized
so that the total annual installment, including interest
and reduction of principal, will amount to not more
than
Q%
exceed
of the principal, the interest in no case to
6%.
Land owners will thus be afforded an op
portunity of improving their farms by ditching, fencing
and by the erection of silos and buildings, diversifica
tion of crops will be encouraged, cattle raising will be
promoted, and the thrifty tenant farmer will be given
an opportunity of becoming his own landlord.
Many who
have heretofore been without hope or definite ambition,
will find a new incentive to work and to accumulate with
a view to ultimate independence.
Southern agriculture
will thus receive a wonderful stimulus, and many of the
young men growing up on the farms whose ambition now is
to go to a town, will find it to their advantage to make
a study of scientific farming and to practice it as a
-1 0 -
life vocation.
Better living conditions in farming
districts and greater prosperity for the farmer mean
decreased cost of living, less concentration of popu
lation in the towns and cities, more schools, letter
morals, and a happier and more contented people.
Pros
perity on the farms means larger orders for the mer
chant, the coal operator, the lumberman and for the
manufacturer;
more business for the railroads, steadier
employment of labor, increased deposits for the banks
and a greater demand for loans.
Consider what Europe
has done for its farmers and how, up to the outbreak of
the deplorable war,
it had improved their condition,
and how the continental powers have been able, through
scientific farming methods, to support themselves during
abnormal conditions.
While the methods adopted in
Europe may not be best adapted to the United States,
surely with some modifications they can be made effective
here.
Nearly one hundred and fifty years ago, Oliver
Goldsmith wrote his greatest poem,
lage."
’'The Deserted Vil
It was a striking exposition of English history
and a remarkable forecast of the future.
-1 1 -
"111 fares the land, to hastening ills a prey,
Where wealth accumulates, and men decay;
Princes and lords may flourish, or may fade;
A breath can make them, as a breath has made;
But a bold peasantry, their country's pride,
When once destroyed, can never be supplied,
A time there was, ere England1s griefs began,
When every rood of land maintain'd its man:
for him light labor spread her wholesome store,
Just gave what life required, but gave no more;
His best companions, innocence and health,
And his best riches, ignorance of wealth.
But times are alter'd:
trade's unfeeling train
Usurp the land, and dispossess the swain;
Along the lawn, where scatter'd hamlets rose,
Unwieldy wealth and cumbrous pomp repose,
Anjp: every want to luxury allied,
And every pang that folly pays to pride.
Those gentle hours that plenty hade to bloom.
Those calm desires that a s k 5d hut little room,
Those healthful sports that graced the peaceful scene,
lived in each look, and brighten'd all the green;
These, far departing, seek a kinder shore,
And rural mirth and manners are no more."
Have we not in American been drifting into the conditions
so graphically described?
let us never lose sight of
the fact that farming is the most important industry in
the world.
Without the farm all other business would
stagnate and die, the railroads would cease to run, the
hanks and mercantile establishments could no longer
operate, and grass would grow in the streets of our
cities, which would no longer he thriving marts of
commerce but would become, through famine, whited
sepulchers of the dead.
Ho other business can succeed
without the farmer, hut the farming business can sur
vive, if left unfettered, without the aid of any other
businesso
(VII.)
WATER POWERS.
let us now consider for a moment the subject of
water.
For some years past, we in Alabama have heard
a great deal about another liquid, and I am sure that
it will be refreshing to turn our thoughts to pure and
unadulterated waters
We need not discuss its superla
tive merits as a beverage or as a cleansing agent, but
rather let us consider its utility as a means of trans
portation and as a source of power.
Bountiful nature
has favored our State in the matter of waterways.
Through the Warrior, the Tombigbee, the Alabama and the
Coosa, the waters springing from the hills in the
mineral regions flow through rich agricultural sections
and discharge themselves into the Gulf of Mexico.
The
work of nature has been supplemented by the national
Government and by means of locks and dams on the
Warrior and Tombigbee Rivers, perennial navigation h^s
been provided from the coal fields to the Gulf.
Already
'.
i -13barges laden with black diamonds pass every day down
the river Just below the University, bound for Mobile
and New Orleans.
Through a beautiful valley in northern
Alabama, flows the great Tennessee River, a majestic
stream which springs from the mountains of North
Carolina and Virginia, and flowing through east Ten
nessee, enters our State near its northeastern corner,
and leaving it at its northwestern extremity, turns
again through Tennessee and, passing through Kentucky,
unites with the Ohio and finally discharges its waters
into the mighty Mississippi.
Most of this wonderful
stream is already open to commerce,
through Alabama,
but in its course
its waters plunge through a series
of shoals and rapids, known as Muscle Shoals, which
i.
block navigation, but which,
if properly harnessed, will
-I
furnish one of the greatest water powers in the
United States.
Locks and dams at Muscle Shoals would
render the Tennessee River navigable from Knoxville to
Paducah, and would, at the same time, offer to in
dustries electric energy of approximately 500,000 horse
power.
When we speak of Muscle Shoals, there results
a triangulation of ideas.
On one side is transportation,
:0
-1 4 on another the fertilization of oar farms, and on the
third, military preparedness,
We all know that nitre,
or saltpetre, is an essential ingredient in the manu
facture of gunpowder and of fertilisers, and that the
world1s great natural deposits of nitre are in north
ern Chile.
We know furthermore,
that the oxygen in
the air we breathe is heavily diluted.with nitrogen,
and that science has found the way, through mechanical
means, of accomplishing the fixation of air nitrogen
into nitrates,
The marvelous efficiency of Germany
as a nation is admitted by her friends and enemies
alike, by her sympathisers and by her critics.
Some
years ago German manufacturers began, under adverse
conditions, the manufacture of nitrates from the air.
When I refer to adverse conditions,
I mean that this
process of fixation requires enormous power and calls
for a tremendous expenditure of energy;
and in a
country like Germany, having no great water powers, this
energy can be supplied at high cost only by the con
sumption of an enormous amount of fuel.
I understand
that not less than 300,000 horse-power must be pro
duced in order to manufacture air nitrates on a
commercial scale, and the only nitrate manufacturing
plant on the American continent is located on the
Canadian side at Niagara Falls.
The bill that has
recently passed both houses of Congress to increase
the efficiently of the military establishment of the
United States, recognizes the necessity of an ade
quate nitrate supply and empowers the President of
the United States to make such investigation as he
may deem '
to be necessary to determine the best,
cheapest and most available means for the production
of nitrates and other products for munitions of war
and useful in the manufacture of •fertilizers by
water power, and he is further authorized and em
powered to ’"designate for the exclusive use of the
United States, such site or sites upon any navigable
or non-navigable river, as may, in his opinion be
necessary to carry out the purposes of the Act, and
he is further authorized to construct, maintain and
operate, at any site or sites so designated, dams,
locks, improvements to navigation, power houses, and
other plants and equipment, or other means than water
power as iij his judgment is the best and cheapest,
T f
-16-
necessary or convenient for the generation of elec
trical or other power and for the production of ni
trates or other products needed for munitions of war
and useful in the manufacture of fertilizers and
other products*TT The hill furthermore appropriates
the sum of twenty million dollars, available until
expended, to enable the President of the United
States to secure this nitrate supply.
I do not know
what recommendations the War Department will make to
the President, nor can I predict what his choice of
a site will be, but I do know that no site in the
United States is superior to Muscle Shoals from the
standpoint of strategic location, the power that can
be generated and the proximity to large deposits of
phosphate rock.
I wish that I were a word painter,
so that I could picture to you.the great opportunity
that is presented to the people of Alabama, and the
far reaching results that would come from the location
of this nitrate plant within the borders of our State.
Imagine a gigantic dam across a broad and majestic
river, a great power house, and beyond, a nitrate,
plant, on one side of which will be built a large
factory where nitric acid will he produced for use in
the manufacture of explosives;
on the other side
works for the production of ammonium phosphate, where
the phosphate reck brought from nearby fields will be
combined with the nitrates and converted into that
important ingredient of all commercial fertilizers,
ammonium phosphate.
The waters of the Tennessee in
thei'r ceaseless flow toward the Ohio and the Mississippi
can generate at a minimum cost after the initial
expenditure has been made, the large amount of power
necessary for the operation of these plants.
This
power, contrary to the fears of many, would not inter
fere with the consumption of Alabama coal, for it would
develop an entirely new indiistry which cannot he es
tablished if dependent upon coal as a fuel.
I wish
that I could picture to you the other important indus
tries that would follow the establishment of this
plant, such as electric furnaces for the manufacture of
the finest grades of steel,
establishments for the
production of aluminum from the vast deposits of
bauxite which abound in east Alabama.
I would point out
to you the wonderful opportunity that would thus be
- 18-
opened to the young men of Alabama, and I can see in
my mind's eye a great school of technology here at the
University, where future generations can be taught the
principles of efficiency and of applied science, which
have done so much for the development of Germany during
the past forty years.
Surely every man of influence
in Alabama will do all in his power to induce the presi
dent to locate this plant on the banks of the Ten
nessee. Many other states have eligible locations
to offer, though none in my opinion can at all compare
with the one at Muscle Shoals.
Every possible in
fluence will be brought to bear by these states to pre
sent their own locations in the most favorable light,
and it behooves the people of Alabama during the next
few months to work as they have never worked before, if
we wish to win this great prize, which would mean an
immediate expenditure within our borders of twenty
million dollars, with industries to follow which will
cost at least thirty millions more.
(VIII.)
DEVELOPMENT OP ALABAMA'S RESOURCES.
There has been too much talk about the great
natural resources of Alabama.
Thr time has come for
4
f
-19-
act ion l
We must develop them!
About two months before
the surrender of the armies of the Confederacy, a con
ference was held by Abraham Lincoln with three. Con
federate Commissioners, at Hampton Roads.
I do not know
whether it is history or whether it is fiction, but the
story is that at that conference Mr. Lincoln, holding
a sheet of white paper in his hand, said to Alexander
H. Stephens,
"Let me write Union on this paper and you
may write whatever else you please." If this story be
founded on fact, what an opportunity for the South was
lostI If we could bring the people of Alabama to a
proper realization of the importance of hard work, of
constant and unflagging effort and of efficiency in
work;
if we could be justified in taking a map of
Alabama and in writing across that map in outstanding
letters reaching from the Tennessee to the Gulf, and
)
from Georgia to Mississippi, the word "Efficiency,"
we would have a great and prosperous State no matter
what else might be written there.
In the South today,
our economies as a rule are neither scientific nor
potentially efficient, nor do our activities contribute
to stop waste and to increase efficiency.
We find
1
2
6
*
-2 0 -
.waste and. more waste everywhere.
We have made only a
beginning in the manufacture of by-products,—
we can
see in half a dayTs journey, thousands of coke ovens,
illuminating the midnight skies with flames which con
tain many elements of wealth, but which are absolutely
thrown away.
Because of the nitrogen which it contains,
a million tons of cotton seed meal is put back every
year into the soil of the cotton fields of the South,'
although overhanging every acre there are over thirtythree thousand tons of atmospheric nitrogen which the
water powers of Alabama now going to waste could take
out of the air and fix ready for use as a fertilizer
for increasing our production of agricultural staples.
(IX.)
EFFICIENCY VERSUS WAS IE.
But waste and inefficiency are not to be found
alone in agriculture.
They are found in the forest and
in the factory, as well as on the farm;
in mechanical
arts and in scientific achievements we lag behind. The
Secretary of the Navy, a Southern man by birth and
rearing, of ardent Southern sympathies, recently se
lected twenty-three engineers and scientists as a civil
naval advisory or efficiency board, not one of intoom was
taken from any activity or association of the Southern
1
L.. ’Ns# i £
- 21-
states.
We are proud of our traditions, yet we have
!
seen other states forge ahead, even the arid states in
the rainless regions of the west, which have in twenty
years secured from the Federal Treasury one hundred and
sixteen million dollars for the accomplishment of
their irrigation projects.
We are afflicted too much
with traditions, resignation,
efficiency.
indifference and in
Too many of the sons of Alabama have left
their paternal roof-trees and have sought their for
tunes in other states.
We must do something, not only
to make it to the interest of the young men of Alabama
to remain at home, but something that will induce the
best elements of the citizenship of other states to
cast their lot amongst us.
According to a poetic fancy
the name ’’Alabama” signifies "here we rest.”
It is too
bad that any should think this means ’’here we do n o t .
work;
here we take our ease," and we should seek to
justify the construction of the word ’’rest” as meaning
"remain;"
so that the name of Alabama henceforth shall
signify, as a matter of choice, and because of the
glorious opportunities offered,
here we remain."
"hence we will not go;
1270
681.
RELEASED FOR THE EVENING PAPERS OF FRIDAY, JUNE $.
Address of Hon. Paul Mi WaTburg
before the Convention of the
New Yof*k State Bankers! Assn.,
Atlantic City, IT* j., June 9, 1916.
The federal,reserve system and the banksA-^ucc^ssful solution of Federal Reserve
problems is dependent equally upon a thorough, under-:
standing of the many features of detail involved in
the technique of banking end upon a strong gra:Jp of
the big and fundamental objects for the accomplishment
of which the system was created.
It is, therefore, a pleasure to address an
audience that is certain tc have a keen and sympathetic
interest in both of these phases of the problbmi
I an. particularly anxious, however, to speak
to you.about ths broader and more fundamental questions
involved, for there is an indefinite feeling of appre
hension in my mind that at thi3 time we may be losing
the big point of view of financial statesmanship, and
that petty and technical questions may be claiming per
haps, too much of our consideration.
±271
681
-2-
Miile in South .America, I had ah oppor
tunity to get a bird1 3 dye-view of the operation
of the Federal Reserve System*
\
With the keenesi
i
.enjoyment and pride I daw our system hitting its
mark many thousands of miles away, and became deep
ly impressed that we are*now firmly establishing
ourselves as a great financial power in the world1s
.market* Upon my return^ I felt a very chilling
change of atmosphere, vdicn I eb t .American bankers
appearing to hold the view that the future of our
great monetary and banking system depends upon
the question -whether or not
* a country bank
might charge exchange of one-tenth of one per
cent when remitting for checks drawn on itself l
. The banking system of a world power can
net possibly be c 021straced upon so small a founda
tion.’
I still remember that, when I had my first
training in banking in Hamburg, thirty years ago
1372
my dear old father*j mind strongly rebelled agdihst
what he considered then the new-fashioned idea of
oemg repaired
*• not by the government, indeed*
out by the general law of competition -» to discon
tinue the practice of charging a small commission
when remitting for checks or maturing bills drawn
on his banking firm*
But he socn perceived that
the eotablisbment of a general transfer and clear
ing oy*tem, postal orders and postal checks^had
made for new condition and that the development
of a discount system based upon modern pnncipleo
of banking,
\hile breaking down certain petxy
revenues, was bringing about a tremendous increase
m
the volume of buoiness.
As a result, he soon
waived his objection*) and lent his hand in turning
his country from provincialism into an international
banking power.
ago.
That, as I oaid, was thirty years
1273
1 have Ac doubt that this country has de
cided that it is entitled tc ac modern a banking
system as the rest of xhe wofla, and that whatever
old-fashioned privilege still blocks the fcath will
have to fall by the wayside-
Tty0 sacrifice will
have to be borne for the general good and will
find its compensation in the freer economic de
velopment of the country.
One of the most tangible results of the
operation of the Federal Reserve System is tns
establishment and growth of the American bank
ers* acceptance business.
In addressing a
group of bankers, it is unnecessary to dwell
at length upon the fundamental importance of
this development for the general safety of our
banking system.
We have now a substantial
market for bankers* acceptances to which all
member banks will look for the.investment of
same of their idle means and in which, at any
\
•
time* they itiay reconvert these holdings into
liquid funds*
The more important this market grows,
the stronger will be the position of the Federal
Reserve Banks, for the greater or lesser volume
of purchases of such acceptances will offer one
of the Federal Reserve Banks' most effective
means of exercising a wholesome influence upon
the fluctuation of interest rates.
A3 normal
conditions are reestablished in the world, this
acceptance market will become an important fac
tor in protecting our exchange position with
foreign countries and, incidentally, our gold
holdings.
It has taken some'time to develop
this market, but I am confident that, from now
cn,its growth will be rapid. One of the ob
stacles that made-the start difficult was found
in the fact that many acceptances, uhich are
made for the purpose of financing importations .
T
6
-
and exportations, have to he drawn and sold in
foreign countries.
. In order to make them nego
tiable in those countries as a popular and current means of exchange, it wa3 first necessary
to find hanks there,which would he willing to
purchase them ’freely whenever offered.
It i3
unnecessary to say that European hanks operating
in these- foreign fields were not over-anxious to
see American hankers enter a business which they
themselves monopolized up to the beginning of
this war.
It is only since our own hanks
went out into foreign lands and established
their own branches that the necessary foreign
market for American acceptances has been de
veloped.
The establishment of foreign branches
of American tanks has been a most important step
in advance, and without it bur acceptance system
could not have progressed as far as it has to
day.
The advent of these American branches
631
-7-
forc'ed the other banks to modify their resist
ance and to compete for our bills wnich, up to
that time, they had tried tc disregard.
It is
to be hoped that other American banks vail soon
follow in establishing themselves in foreign
countries.
As you knew, the Federal Reserve
Board has recommended an amendment to the Act
to enable national banks, singly or jointly, to
hold stock in
banka organized "princi
pally to do business in foreign countries. "
Ohe U 11 has already passed the House, and .
another has been reported favorably by the Sen
ate committee on banking and currency. The Board
hopes that a satisfactory bill will be agreed
upon by both houses in the very near future.
It is a strange fact,however, that many
of our business men, who enjoy the reputation
of being keen and progressive, are actually
wasting their funds by still using foreign ac-
ceptance credits instead of- American.
At Rio,
I found tc my surprise that the majority of
American coffee importers were still using let
ters of credit in sterling for which they were
paying a discount rats of about.
as against
the American discount rate of 2f>. Moreover, in
doing so, they were often paying two commissions,
one tc the foreign hanker- who issuesjand one to
the American hanker who opens the credit, in
stead of paying a single'commission to the Amer
ican hanker.
It is true that the wool and hide busi
ness, done by New England with the Argentine, is
today .financed by dollar acceptances drawn on Bos.
ton and New York, and that the oriental trade has
begun to use dollar bills, but it is surprising
that so large a number of New York importers
are still clinging to their old pound sterling
acceptance arrangements.
1278
631.
- 9
Let me venture to urge most earnestly that
our bankers canvass xheir lists of importing and ex
porting firms and point out to them tne folly of not
using American banking facilities.
Since my re
turn I have tried to see personally some of these
large importing firms and explain to them tho anomaly
of their action.
I believe,, however, than an asso
ciation like yours is particularly wall adapted for
carrying on a campaign of education of this kind,
With our increasing financial strength and
with the daily diminution of Europe's saving power,
it stands to reason that, for a long time to come,
our discount rates will compare favorably with those
of Europe.
We may expect, therefore, that this
acceptance business will not only hold its own, but
will grow and may be used to a substantial extent
even by European importers and exporters, and thus
relieve Europe of some of her financial burdens.
*
631
10
-
While our foreign competitors, with few
noteworthy exceptions, are still trying to keep
cur dollar acceptances in obscurity, our machinery
is now firmly organized•
There are now local
banks almost everywhere abroad willing to buy
American drafts going forward for acceptance and
to deal in dollar exchange on practically the
same narrow margin which prevails in dealings in
sterling, marksJor francs, and the Federal Reserve
Banks are willing, whenever desired, to do their
share by quoting favorable "forward discount rates"
to assure the rate of discount pending the time of
transit.
This new feature of American banking,
which is to be one of the roots of our strength
and, at the same time, a new source of profitable
and sound banking, ought to be developed energetically
by both our bankers and cur business men.
79
681
In this connection, it may not he amiss to
give you a short account of the conference of the
International High Commission at Buenos Aires.
In our deliterations, the question of "bank
ing was given particular attention, and I am happy
to report that the general tendency at the con
ference was to do everything possible to foster
trade relations between the United States and
her neighbors to the South, and mutually to open
the doors ’.vide to one another's banks.
Resolu-
ions w0 2T8 psijsed making for the adoption by
Central and South America of uniform laws concern
ing bills- of exchange, bills of lading, warehouse
receipts, and similar matters.
A further recom
mendation was adopted by the conference urging
the respective governments to enact legislation
giving the widest possible protection to the
sellers of goods.
You. are all lard Hat* with the agreements
for the arbitration of business disputes made be
tween the United States Chamber of Commerce and
the Chamber of Commerce of Buenos Aires*
We may
expect that other countries will follow in the
very near future, and the creation of these agree
ments will be an important factor in obviating
the annoyance and delay of protracted litigation
in foreign countries and in providing for both
sides a safe and satisfactory basis for commerce
and trade»
It would lead too far to enumerate all
the topics discussed by the conference. I should
not omit, however, to mention that a resolution
was passed recommending that all the republics
of North,Central;and South America adopt a uni
form standard of money of account on the basis
of a gold coin 9/l0 fine and weighing 0*33^37
gramme. Thi3 unit, which might be called the
Pan American Franc, though nearly the value of
the European franc, is not iid &xa&4 equal, Tout
is precisely one-fifth of the United States gold
dollar.
Delegates to the conference had suggest
ed making the gold dollar of the United States
the unit for all American countries, but against
this it was pointed out that the dollar would
be too large a denomination for many of the
Southern republics, where small coins circulate
and vhere, it was feared, the larger unit of
money of-account would bring about an increased
cost of living. Moreover, the United States
gold dollar could not be divided into subsidiary
coins small enough to comply with the known de
mands of many of these countries.
It was
thought, therefore, that a unit of the approx
imate size of the franc would be better adapted
to the needs of these countries, but, by adopt
ing as the standard unit the exact one-fifth of
\2HP,
the United States dollar,, the foundation will
have been laid for a Pan American union of
coins which, sooner or later, may become of
great importance-
If this plan should be car
ried into actual effect, the Pan American 20
Franc piece could ultimately circulate with us
as a $4 gold piece and our $5 gold piece could
circulate as a 25 Franc piece in South or Cen
tral American countries.
A unity of standards
of this kind will, of course, have great advan
tages in facilitating trade between nations.
Amongst republics having actually introduced a
gold currency on this basis it might ultimately
lead to an ■understanding for the establishment
of international gold trust or clearing funds,
having for their object the elimination of the
costs and risks caused by our present wasteful
method of shipping and remelting gold coins.
plan on these broad lines, submitted by the
1
A
Americen delegates, was recommended by the con
ference for closer study to all governments con
cerned.
The immediate practical importance of this
step may not be great.
As indicative of the
trend of future relations between North and South
American republics, however, it can not be over
estimated.
It shows, as one of the effects of
the war and of our financial emancipation, that
the North and South have recognized their common
economic and political interests; that they have
begun to consider this large hemisphere as one
economic unit, and that they are now looking to
each other for mutual help and cooperation in
the future development of their respective prob
lems.
A Pan American monetary union, therefore,
now appears a more natural basis for the future
monetary systems of American republics than a
>3
Latin union based upon an agreement with France,
Italy, Swtizerland and Belgium.
Our friends in South American consider
the creation of our Federal. Reserve System as one
of our greatest achievements, and their willing
ness to rely upon our ability to provide - to a
certain extent at least - such financial aid as
Europe gave them in the past is predicated upon
the confidence that our new system inspires .
Some of these republics are carefully studying
.this system .with a view to establishing, at the
proper.time a similar -banking machinery.
In
view of the fact that several of these coun
tries are federations like the United States
and cover tremendous areas of territory, it is
evident that certain features of our system
would be particularly well adapted to their
needs.
85
681
-1 7 -
Tfthile observing financial and commercial
conditions in these countries, it was deeply im
pressed upon my mind how much the United States*
by legislative action, had in the past, handi
capped the development of .our business in foreign
lands. It would lead too far to mention to what
extent our own legislation in the past has driven
our merchant marine from the ocean and how far it
has handicapped our industries by not permitting
reasonable trade combinations enabling us to com
pete in foreign markets. But it is well within
the bounds of this address to mention that the
British, French and German banks for generations
have been entirely free to go into foreign coun
tries to open branches or acquire foreign banks
and to do everything and anything to further their
banking and trade.
On the other hand, our na-
si
681.
- n a
tional banks, until the passage of the Federal
Reserve Act, were forbidden by lew to enter
these fields or to accept drafts for importations
or exportations or to exercise many other functions
necessary to develop foreign tanking and foreign
commerce.
It is a relief to feel that at least
the time has come when a clear recognition of
our country's banking needs is asserting itself
and when most of these old shackles have been
removed.
Whatever obstacle remains we may con
fidently hope to see gradually eliminated.
Some amendments along these lines are at
present under consideration by Congress, and have
already been favorably reported.
The Board has recommended that Congress
permit member banks to give their acceptances not
only for the financing of transactions involving
importations and exportations,
but
also,
<ru
to a limited, degree and under the supervision
of the Federal Reserve Board, for bankers’ clean
three months’ drafts, such as are required in
foreign countries for remittances abroad.
As
most of you know, in South America, such remit
tances to foreign lands are generally not made
by checks but by three months’ drafts, and it is
necessary that national banks be permitted to
accept for this kind of foreign exchange trans
actions:, if the dollar bill is to be used as freely
in foreign lands as is the sterling, the franc,
and the mark exchange.
Turning to amendments touching domestic
operations, we have recommended that national
banks be permitted to accept drafts or bills
growing out of transactions involving the do
mestic shipment of goods, provided shipping doc
uments are attached at the time of acceptance,
■f!OfiQ
and drafts and bills 'which arc secured by ware
house or similar receipts covering readily mar
ketable staples,or by the pledge of goods actual
ly sold.
We feel confident that, by enlarging
the powers of national banks to accept in this
manner we shall open for our member banks a new
and profitable field of operation, and incident
ally the free development of this kind of bank
ers’ domestic acceptance will be an important,
factor in equalizing interest rates in the var
ious parts of the country and will be of great
benefit in this respect alike to producer and
consumer.
We have also proposed an amendment
authorizing any national bank, located in a city
of more than 100,000 inhabitants and possessing
a capital and surplus of $1,000,000 or mere, to
establish branches within the corporate limits
of its city, and authorizing any national bank
-ff o ?
- ;-,„rsse>
j
681
-
21-
located in any other place, with the approval
of the Federal Reserve Board, to ectablish
branches within the limits of its county cr
within a radius of 25 miles
of its hanking house,
irrespective of county lines. In recommending
the county line for branches, the Board was
moved by the thought that it might be found
convenient for several small hanks doing busi
ness in the same county to combine into one
larger hank, thereby reducing the overhead char
ges and making the deposits of one part of the
county available for the demands in another. It
is the hope of the Board that in some districts,
through such cooperation, it will he possible
to reduce the exorbitant interest rates which,
in some instances, have been charged by small
country banks.
The Senate committee ha3 stipula- •
ted that, for the beginning at least, the num
ber of branches of a national bank shall be re-
90
..f, r %
681
-
23-
stricted to ten.
We have further recommended to Congress
that any national "bank, not situated in a central
reserve city, be permitted, within the same limits
now existing for loans on farm lands, to make
advances maturing in not ever one year on improved
real estate located anywhere within a radius
of
one hundred miles of its place of business. Wnile
the Board doe:; not favor the idea of having na
tional banks make heavy investments in mortgages,
it was felt that they should not be precluded
from taking, within certain reasonable limits,
first mortgages as collateral security for their
loans.
These are the additional powers that
we have recommended to be given to national banks.
As to the Federal Reserve Banks, we have suggested
that Congress permit them to make advances to
their
member
banks
on
the
latters1 own
91
,<v
681.
- 23 notes secured by eligible paper, such loans to
be for periods not exceeding fifteen days.
This
has been done with a view to enabling Federal Re
serve Banks to accommodate members who, in the
check clearing or otherwise, might bo short in
their balances and wish to have short advances
at moderate rates.
We.believe that this power,
if granted to Federal Reserve Banks, will greatly
increase their ability to take care, in a simple
and effective manner, of the requirements of
their members, and particularly of country banks.
Vie have further recommended that Congress
permit Federal Reserve Banks to issue Federal
Reserve notes, not only against commercial paper,
but also against the deposit of gold.
This
amendment, if granted, -would greatly strengthen
the lending power and the note issuing power of
Federal Reserve Banks.
It is the seme method
93
that has always been followed in Europe by the
Barque do France, the Reichsbank, the Bank of
the Netherlands, the Bank of Italy and many
other government banks.
These institutions are
enabled, through their note issue, to assemble
a large part of the gold of the country in a
central reservoir.
With us, up to the present
time, this accumulation of gold has taken place
to only a moderate extent and hao not benefittea the Federal Reserve Banks to the fullest
possible degree.
If the amendment were to be
passed, the gold, instead of being segregated
with the Federal Reserve Agent, would remain an
asset of the Federal Reserve Bank, and, on the
other hand, the notes issued against it, instead
of being, as at present, technically redeemed,
would remain the liability of the Federal Reserve
Bank.
In case the amendment should pass, it is
hoped that the Federal Reserve Banks may count upon
the cooperation of their members in order to facili
tate this substitution of Federal Reserve notes for
gold certificates at' v-h-cent carried in the pockets
of the people in the old-fashioned and uneconomic
manner.
As in modern European count ries, the gold
should-accumulate in the FederaltReserve Banks and
the people should use instead the Federal Reserve
notes. The amendment would be an important step in
the ultimate simplification and consolidation of
our circulation.
These are the principal amendments recom
mended by the Board at this time.
You will notice,
gentlemen, that they move in two directions. The
one is an increase of the Reserve Bank’s general
strength and lending power and an enlargement
of
their
scope
of
usefulness
in
dealing
1295
681
- 26 -
with their members; the other i3 the re'mov'p.i of
limitations heretofore placed upon the opera
ticno of national hanks. The Board feels
keenly that, as a matter of equity, national
bank* should he placed on a parity with State
hanks and trust companies, vdierev^r this can he
done consistently with safety and conservative
hanking principles. But I wish to make it clear
that the Board has recommended, and will recom
mend, only -such measures as will eliminate oldfashioned or ur.wi3e restrictions such as should
he removed under any circumstances, irrespect
ive cf Aether or not the State banks exercise
greater or lesser pc./ers. The Board would never
recommend granting national hanks any powers .or
privileges Tifcich are contrary to good hanking
principles.
It
is to the interest of both State
institutions and national hanks that hanking
1296
631
-27-
standards should he raised wherever practicable
and not that they should he lowered. Between the
national and State hanking systems, there must
not he any competition to secure more members hy
a lowering of banking standards. The vdiole
country would suffer if this took place. It
would he the height cf folly if States were to
lower their requirements for no other reason
than to underbid the requirements of national
hanks. To a certain degree this has been donewhere State goverments lowered the reserve re
quirements for their hanking institutions because
the Federal Reserve Act lowered the reserve re
quirements for national hanks. The lowering of the
reserve requirements for national hanks was prodicat6d,however, upon their joining the Federal
Reserve System subscribing to the stock and put
ting some part of their reserves into the joint
jLi'*i/ ^
681
- 28-
insurance fund,and being bound ultimately to
abandon the method of pyramiding reserves and ■
to keep them instead either entirely in metal
lic form or with the Federal Reserve Banks.
The reserves of State institutions, on the
other hand, were lowered without their being
t
required to join the system, make any such con
tribution, or discontinue pyramiding reserves.
Moreover, lower reserve requirements are jus
tified for member banks because they may have
direct recourse to the rediscount facilities
of the reserve system, but non-memb6r banks
have no such direct access.
I wish* I could adequately impress upon the
minds of all our bankers that there i3- no such
thing as doing anything for the Federal Reserve
System. Whatever the member banks do, and .what
ever the State banks do> they do for themselves
1298
681
-29-
and for the country. The Federal Reserve System,
a3 such, i3 nox a 3elf-seeking and profit-making
organization. It "belongs to the entire country.
It is there for the benefit of everybody
for
the greater security of the banks, and, through
the banko, for the security of the'people. If
you strengthen the Federal Reserve System, you
strengthen yourselves. If you raise the sxancUard of banking, it is for your own benefit not for xhs benefit of the Federal Reserve Banks,
or least> of all, for that of the Federal Reserve
Board.
These things appear trite,but still I cam
not help expressing them because it
i3
so absolute
ly essential that the thought be overcome that
there can be such a thing a3 a conflict of interests
between the Federal Reserve System and the banks.
The Federal Reserve System and all it means
is felt as an opposing factor where it
comes into conflict with had hanking practices.
It is true that the law has f or one of its ob
jects the removal of certain,habits which have
crept into the old hanking system, hut it is
equally true that, by removing them, financial
catastrophes such as used to befall our country
with uncanny regularity, are to be avoided in
the future.
Let us consider, as the strongest case
in point, the pyramiding of reserves.
I wash it
had been possible to stamp out this e-avil within
a short time alter the opening of the Federal Re
serve System. Is it is, many of the smaller
banks are still in the condition of a patient
who knows that he must undergo an operation in
order to be fully cured, but whose mind every
now and then rebels at the thought, and who con
tinually relapses into arguing with himself that
after all, he might possibly prefer to continue
(!>
to live with his disease and take his chances
of the certain recurrence of acute convulsions
and intense suffering rather than to have the
operation performed.
The country,, however, has
decided that the operation is necessary for our
future safety and growth, and the vast majority
of our hankers are in full accord that it is the
wisest thing to do.
The pyramiding of reserves
will thus end on November 16, 1917.
But, as I
said, I wish the operation had already been
performed.
At present our national banks apparently
have excess reserves approaching one billion dol
lars.
Of these, a substantial proportion repre
sents items in transit between the depositing
and the depository banks;
the balance, ex
cepting about $100,000,000 excess cash in vault
held by all national banks outside of New York,
is kept entirely in central reserve cities, the
hulk being in the City of New York*
There it is
on deposit - drawing interest at the rate of 2$ and loaned out on stock exchange and other col
lateral, or invested in commercial paper, except
as to the required reserve of 18$ and the small
total excess reserve of about fifty million dol
lars.
This is a reduction of excess cash re
serves in New York of over $100,000,000 since
January 22d.
If Farmer Jones deposits $1,003 in a bank
of Elk River, Minnesota, and this bank should in
turn deposit this amount in a bank at Minneapolis
and the Minneapolis bank in turn deposit it in New
York at 2$ interest, and New York invest this
money in a piece of commercial paper at 3$ in
terest, it is a .most extraordinary and unique
method to permit Elk River and Minneapolis to
If
count these deposits as reserves, while if the
hank of Elk River had itself bought the piece of
p&#er it would havi carried it as a loan and all
the rest of the structure of reserve hank depos
its and reserves would have been wiped out*
In other words, in the final analysis, if
we consider the system as a unit, there is not
an excess reserve of one billion but only about
in cash;
$150,000 ,000 './ the balance is invested to-day in
the "float", representing uncollected items in
transit, commercial paper, stock exchange loans
and securities.
If we study the changes in the
condition of the New York Clearing House nation
al
banks which have occurred between October Jlj
191^4, and May 1, 1916, we find the following in
creases estimated at:
*>
JmO 03
681
- 34
Oct. 31/14
May 11/16 .
Collateral loans.... 5^7 mill- to 95^ - plus U07
Investments in securities..........
10 o
11
"
230 - . "
I7 U
Unsecured loans
which include com
mercial paper.....
Uo6
11
n
667 -
261
,T
A total increase of ................
During that period,
deposits increased
from...........
1200 n «
210 0 -
$8^2
"
900
In addition, collateral loans and holdings
of securities of New York non-member trust com
panies increased by about half a billion since
the end of 1 9 1 U.
These are phenomenal increases and we might
well ask ourselves whether or not we may take it
as a certainty that so extraordinary a growth
will prove to have come to stay or whether a
return of more nearly normal conditions will not
bring about a contraction.
We should well con
sider this question, because'an increase of 90 $
f>
in securities and collateral loans; - that is, an
increase of over $1,000,000,000 in New York City
Clearing House institutions - might well suggest
a policy of liquidation rather than one of fur
ther expansion.
Our national tank cash reserves
in central reserve cities (including balances
with Federal Reserve Banks, figured at 100$)
were as of March 7, 22*83$; in reserve cities,
11.53$, 'and in country banks 9.80$ *.
Notwith
standing that the aggregate cash held by all
national banks increased from May, 1915, to
March, 1916, by over $100,000,000; in central
reserve cities we are today materially below the
* If we figured these balances at 70$, being
the present cash reserve condition, and the act
ual' metallic reserve, and added to cash in vault
the metallic cover maintained against reserve
agents’ balances, the present cash cover would
show as follows: central reserve, 20.51$; re
serve cities 13.66$ and country banks 11.83$.
04
old cash reserve requirements, and if a situa
tion like the present had existed during any
ante-Federal Reserve System period, we should
have considered it a cause for alarm.
Thanks
to the creation of our new banking system, we
are now dealing with completely changed condi
tions, and the spectre of the end of the lend
ing power of the banks would not mean a panic as
in the past because of the reserve lending power
of the Federal Reserve Banks and the confidence
created by their existence.
But, gentlemen,
that must not lead us into the illusion that
this billion of so-called excess reserves may
be considered as a basis for a loan expansion
of four billion dollars or more, as appears to
be the general belief.
Theoretically there is
the foundation for so large an expansion as
long as we adhere to the old custom of counting
681.
37 -
bank balances with reserve agdhts and uncollected
iteira in transit as reserve, yet, in the last
analysis, it is the metallic cover - not the redeposited and actually invested reserves - which
must be considered in dealing with this question
of expansion of loans.
The excess of our metallic
reserve, plus the free gold of the Federal Reserve
banks, constitute the basis of the reserve lending
power of our country.
We are at present in a condition of extra
ordinary strength.
We have bought back our own
securities and made foreign loans to an aggregate
amount far in excess of $2,000,000,'000.
Our
financial position for the future has thus been
greatly fortified.
But the process of absorption
of our securities returning from abroad should
be conducted on such
turn the individual
basis and scope as to
depositor
into
an invest-
681
-38-
or so as to free our gold reserves rather than
increase our loans on an enla,rged floating sup
ply of securities.
We must not forget for a moment that not
even the most experienced can foretell what de
mands may be made upon us in the future.
At
the end of the war our opportunities will be
gigantic, but ultimately they will be limited
by the extent 'to which we are able to control
our gold.
There cannot be an]/- doubt that the
demand for gold at that time will be very keen
and determined.
Wise statesmanship, to my
mind, therefore, would indicate that every
thing should be done by the Federal Reserve
System and by ail the banks that are interest
ed in our strength to watch carefully further
expansion at this time and to accumulate the
floating gold supply in the hands of the Fed-
eral reserve banks so as to enable 'them* when
the time domes, if necessary, to spare large
amounts without thereby crippling their lending
power.
We are in a period of wide-spread pros
perity at this time and it must be our serious
concern not to weaken its solid foundation*
The
ease of this summer might well be used to
strengthen and prepare ourselves for the large
problems that may be in store for us.
It is impossible to try to prognosticate
with any degree of certainty what will t>e the
trend-of interest rates at the end of the war,
but assuming that interest rates for invest
ments in Europe will ebe high, and that the de
mand for gold on the part of Europe will be
keen, we would have to expect as a consequence
that eventually our rates will have to move up
so as to approach theirs mors closely, and be
fore we reach that point probably a substantial
amount of our gold will have to leave the country
and return to
foreign lands.
To preserve the
advantage of our strength and to maintain
our
money rates on an independent basis of cur own in spite of the close inter— relation that must
exist between us and Europe - will be one of
our interesting but difficult tasks.
The establishment of the Federal Reserve
System has been a step of inestimable value in
the direction of efficient control of our country’s
gold holdings; and, if we do not disregard all
rules of business conservatism and prudence, it
will prove an efficient means of protection in
case of emergencies.
If we want more than a strong instru
ment of defense and protection, if we desire - as
we are entitled to - that the Federal Reserve
System be the foundation of a banking structure
581.
41 -
contributing its full share in rebuilding the
World and at the same tune assisting our own
country to meet all the new demands, -whether
domestic or foreign, that the future may make
upon it, then we must do all we can to preserve
its strength and to broaden its foundation by
further perfecting methods of systematically
accumulating and economically using our
vast treasure of gold*
loo large a proj>6rtion
of this gold still remaihs wastefulljr fedaiteredl
and decentralized.
The gold stock of this country is es
timated at $2,320,00C,000.
Of this amount, only
$335,000,000 is held in the vaults of the Federal
Reserve Banks and about $180,000,000 is in the
hands of the Federal Reserve Agents.
The national
banks and State institutions hold about $800,000,000, and there is estimated to be in actual
681.
- .1+2 -
circulation about $870,000,000.
If we abduct
from the $335,000,000 held by all federal Re
serve Banks a minimum reserve of only 40%,' that
would leave as their fi~ee gold about $200,000,000.
This is an invaluable item of strength as
a basis for a note issue of $500,000,000 in
case additional currency should be demanded by
our people; and the Board, by permitting the
reduction of the 40% gold reserve, could, in
case of emergency, sanction the issue of even
larger amounts.
When, however, it comes to ex
portations of gold you can readily see that the
$180,000,000 now accumulated with the Federal
Reserve Agents would serve as a very welcome
additional protection.
For we have learned,
gentlemen, that this is a period of economic
history, ’
where balances between nations are
not dealt with in millions, but in hundreds
of millions
1313
681.
- 43 -
Think of the strength that our system
might possess if we carried into effect the
policies pursued by the Banque de France., the
Reichsbank or other powerful central banks, and if,
for a substantial part of the $870,000,000 of
actual gold circulation, there were substituted our
Federal Reserve notes, and if national and State
banks kept in their vaults only what they needed
for till money and deposited with the Federal
Reserve Banks the rest of their idle gold.
We talk of preparedness as the need of the
hour.
If we contemplate what European nationa
have done, before and during the war, to streng
then their grip on their gol^ and compare it
with our own efforts, ws find that our financial
preparedness is just in its first stages.
The
amendment recommended by the Board should prove
an important step in advance in this direction
1313
681 a
- 43-x -
In view of the statement made by some, of
Our critics that this substitution of Federal Re
serve notes for gold certificates means inflation,
it might be timely to point out that, by a simple
substitution of one note for the other, there is,
of course, no increase in the volume of circula
tion whatsoever.
It is merely a change in the
form of circulation.
As a matter of fact, we
find that the operation of all Federal Reserve
Banks for a period of one and a half years has
caused a net increase in the circulating medium
of the country,
serve notes and
by the issue of Federal Re
Federal Reserve Bank notes,
of less than $10,000,000*
On the other hand,
the national bank circulation has decreased
during the period Hovember 2, 1914, to June 1,
1916, by $53,000,000, exclusive of the redemp
tion of the approximately $385,000,000 of
emergency currency issued under the so-called
1314
Aldrich-Vreeland Act,
While it is evident.,
therefore, tha/t the Federal Reserve System
has not increased the volume of circulation,
the process of substituting, as a moans of
circulation, the Federal Reserve note for the
gold certificate has the most important effect
of strengthening the potential lending and note
issuing power of Federal Reserve Banks in case
of need.
To refuse this larger power of pro
tection for fear that it might be misused
would be rantamoum to refusing to give a modern
revolver to a policeman for fear that he might
shoot at the wrong man and at the wrong time.
1315
681 <
- 44 -
But, let me ask you, gentlemen, is this
the proper time for country bankers to urge us to
recommend to Congress the further reduction of
their reserve requirements or to recommend that
they be granted permission to continue to hold
a certain percentage of their reserves with
their central or reserve city correspondents'?
Some day, no doubt, it will be proper to
reduce reserve requirements, but that can only
be brought about by a systematic strengthening
of the central reservoirs.
The stronger the
Federal Reserve. Banks, the easier the access
to their resoui'ces by sale of liquid paper,
the less will become the necessity fcr member
banks to maintain in their own vaults, as a
legal requirement, large segregated gold hold
ings .
1316
681.
- 45 -
Steps in this direction are: first,'the
substitution of Federal Reserve notes for the
gold circulation in the pockets of the people;
second, the maintenance with Federal Reserve
Banks of larger member banks? balances, created
by depositing part of the “optional” now kept in
vault by member banks, and, finally, the increase
of the number of depositors to be secured
through the entrance of the State institutions
into our system.
I want to compliment our large member trust
companies and State banks upon the broad point of
view which guided them when entering the system;
but I might at the same time ask their powerful
sister institutions how, under present conditions,
they can justify themselves in staying out of the
system and in throwing the entire responsibility
and burden upon the shoulders of the national banks
1317
681.
_ 46 -
and those few trust companies and State tanks that
have hecome members?
They do not contribute their
fair share of gold to the general reserve fund of
the nation,
nor do they provide their share of
the capital cf the Federal Reserve Banks.
Indeed,
not only do they fail to contribute their share
of strength to the system, but unconsciously per
haps, they become forces that make for the direct
weakening of its strength and efficiency.
Do the large trust companies and State
banks claim that pyramiding of reserves is sound?
Would they prefer to see our ancient system per
petuated and the reforms contemplated by the Fed
eral Reserve Act abandoned so as to make room
again for the good old conditions of 1893 and 1907?
Unless they are willing to subscribe to that doc-
1318
trine, how can these large hanking institutions,
some located in Central Reserve cities, justify
themselves in considering as reserve, after the
manner of the country banks, their interest bear
ing deposits with other banks?
If a call loan on the stock exchangemade by a trust company is not a reserve but a loan,
is it sound banking to call a reserve deposit
made by a trust company in a national bank a re
serve, when 82$ of it is loan on call on the
stock exchange?
Still, it is just through
these deposits that, in emergencies, the trust
companies will lean on the national banks and
the national banks, in turn, will fall back on
the Federal Reserve System*
The net result is
that the trust companies, in building up their
business structure, must rely today on the
greater assurance provided by the Federal
±319
Reserve System, though
permitting the member
banks to carry the entire burden of its support.
Our small country banks will have to stop pyr
amiding of reserves; do the large trust companies
and State banks plan to continue this practice?
What is it that powerful and prominent
institutions,(some of which, in their foreign
and acceptance business, derive the greatest pos
sible advantage from the discount market and the
general prestige of the Federal Reserve System,)
may say in justification of such an attitude?
At first they feared that, by entering
the system they might lose some of their present
powers and privileges.
But the Board has made
regulations permitting them to continue to ex
ercise practically all legitimate banking func
tions enjoyed by them in the past.
681.,
- 49 -
Some of the State institutions have raised
the point that, by joining the Federal Reserve
System, they would be called upon to make invest
ments in the stock of the Federal Reserve Banks
upon which, in the case of most of the Federal
Reserve Banks, no return has as yet been paid.
But, gentlemen, while for many reasons
some of us would favor an amendment permitting a
Federal Reserve Bank to pay back a portion of
the capital paid in (leaving the liability upon
the subscribed but unpaid capital otherwise un
changed) provided the member would in turn agree to
increase its required reserve balance by a certain
proportion of its optional balance, this question
in itself can not possibly be of sufficient im
portance to keep any strong State institution
out of the system.
These dividends are
1321
681.
- 50 -
cumulative, and anybody having a moderate de
gree of foresight can readily approciate that,
sooner or later, the back dividends will all be
paid.
of
Even at the present low rate of return
2 .4 /3,
secured by Federal Reserve Banks from
their investments, they would have to employ
only an additional sum of less than $50,000,000
for the entire system to earn the full six per
cent on the stock at present paid in.
When
the final instalment of reserves has been trans
ferred and with the return of more nearly .
normal rates of interest, there will not be the
least difficulty for these banks to earn their
dividends without investing a larger proportion
of their resources than would be consistent with
safety ana conservatism.
State banks and trust companies furthermore
681.
- 51 -
claimed that if they entered they could not
withdraw.
But the Board in the exercise of
its power to prescribe regulations as a con
dition of membership,, has provided that they
may withdraw under conditions previously made
known,and the subscription to the stock of a
Federal Reserve Bank made by a State institu
tion is conditioned upon this express agree
ment .
They have objected to being examined
both by their own banking department and by
the examiner of the Comptroller of the Currency.
The Board, in accordance with the provisions
of the Federal Reserve Act, has provided, how
ever, that, wherever there is an efficient
State examination, as in New York, it shall
be accepted in place of examination by the
681
- 52 Comptroller and, only failing that,, an examihation
shall he made by examiners under the supervision of
the Federal Reserve Board#
Furthermore., in a circular letter sent
to all State member banks in May of this ye£th, the
Board and the Comptroller of the Currency announced
that State member banks in making their stated re
ports to the Comptroller of the Currency, might use
the form of statement prescribed by their respective
State banking departments, provided they are rend
ered as of the same date as required by the Comp
troller of the Currency for national banks*
If
reports are not rendered on those dates, State mem
ber banks are required to use the same forms as na
tional banks, but they may omit from their reports
to the Comptroller all schedules except that relat
ing to coin or coin certificates.
They have feared that the Clayton Act
would deprive them of valuable directors*
But
Congress has amended that Act so as to permit
a director of a member bank to be* at the same
a '
time,/.director of two other banks or trust com
panies, provided they are not insubstantial
competition “with the member bank.
I know the arguments tha~ are being
advanced that the rulings c l the Board may be
changed and that, therefore, it may be possible,
under a different personnel of the Board,to re
verse the present arrangement and subject tho
State banks tc the examinations.* reports, and
rulings of the Comptroller of the Currency* But
that is not likely to happen, and if it did, the
State bank or trust company could exercise its
privilege to withdraw from membership' in the
system.
Let us assume,however,that joining the
1325
581
~2-A-
Federal Reserve System does involve certain
sacrifices,, some of which are necessary-and
some of uhich may be thought unnecessary*. If
you throw into one side of the scales all thar
benefits accruing tc the bank3 and the nation
by the creation of the Federal Reserve System J
and into the other the sacrifices to be mads by
its members, there can not be any doubt what
soever that the advantages will outweigh the
disadvantages a thousandfold* The Federal Reserve
Act is one of the most constructive pieces of
legislation that ever was put upon our statute
books* Nobody could be foolish enough to expect
that a lav/ which is so complicated in its nature,
so far-reaching in its scope, and a ccmprimise in
so many details between opposing views, could be
absolutely perfect*
It is a wonder that, frcm
the beginning, it has proved as workable as. it
1326
681
^■3-rA-
has*
Personally* I am on record as having
posed several of its features of detail*
But,
when the President honored me "by inviting me to
become a member of the Boards I accepted be
cause I felt that the fundamental principles
were sound and that the Act, as it stood, would
redound to the greatest benefit of the country.
I felt confident that if after sincere and un
biased efforts in the operation pf the Reserve
banks, defects should develop that needed
cor
rection, we could confidently count on a pa
tient and sympathetic hearing before Congress*
And let me remind you, gentlemen, that several
of my colleagues and the able men vho accepted
to serve at the head of your Federal Reserve
Bank .of JTew York, all ,j cined in the same spirit;
they did so for th6 purpose of serving their
ap
1327
681.
- 4-A -
country oven though, they had to make material
sacrifices in doing so.
In one of his admirable speeches., entitled
"Ideals and Doubts",
Oliver Wendell Holmes, As
sociate Justice of the Supreme Court of the United
States, makes the following statement concerning
the. topic of legal reform;
"To know what you want and why you
think that such a measure will help
it is the first but by no means the
last step towards intelligent legal
reform.
The other and more diffi
cult one is to realise what you must
give up to get it, and to consider
whether you are ready to pay the
price."
These £,re golden words of wisdom which, at
the present juncture of our economic history, every
bank president in the United States ought to have
constantly before his eyes.
For generations we have lived shackled
and constantly menaced by a defective and oldfashioned banking system;
for years we have
toiled to secure reform.
We have at last brought
it about and, whether or not it pleases everybody
in every detail, it behooves us all to do our
share in making it a success for the greatest pos
sible benefit of our country,
no matter whether
it involves some small or even a heavy sacrifice.
That is the principle which members of the Board
have laid down for themselves, and if they are to
be faithful to their trust and successful in
their task, there is no other principle upon
which they can deal with the banks of the country.
That is why, though sincerely appreciating the
hardship it entails for the country banker, and
fully sympathizing with the difficulties of his
position, we must say to him: "Forget these ex
change charges. We think our new clearing plan
is fair and equitable, free from unsound principles ■
and bound to become a very effective instrument for
the general good.
It offers to take from you at par
all your checks on any member bank of the entire United
681
- 6-A -
States, and certain State banks in addition,
and will refund you any actual expense that you
may incur in case you have to remit currency.
All it asks of you in return is that you remit
without 'charge to your Federal Reserve Bank in
payment of checks drawn on yourself*
But even
if we did not believe that, by the service we
render and by relieving you of the necessity
of maintaining bank balances all over the
country, we shall compensate you for what you
think will be your loss, we have to hold to the
view that you must pay the price - whatever
your little share may be - for the larger bene
fit of all."
The new system brings new opportunities,
as an illustration, let me remind the country
banker that his exchange lose will appear to
him very unimportant if he will adopt, the habit
1330
6SI.
- 7-A -
of paying for his deposits a fluctuating rate
of interest, which should always remain a cer
tain percentage heiow the ninety day discount
rate of his Federal Reserve Bank-
The unrea
sonable rates paid for deposit money are a seri
ous menace to the safety of our banking system
and the economic development of our country.
And, with this seme spirit, and even
with greater emphasis, we must say to the State
banks and trust companies:
At this momentous period of its financial
history, the country is entitled to have its
banking system attain its maximum strength.
Ir
respective of burdens involved - imaginary or
real - it is the duty especially of these large
State institutions to come in promptly and con
tribute their share, making whatever suggestions
they think helpful as friends and members rather
than as critics from the outside.
I am glad
to state that one of our largest trust companies
expressed precisely this broad point of view
when applying for membership.
The Federal Reserve System will grow
stronger with every coning day, and the stronger
it grows and the more it perfects its organiza
tion, the more apparent will its benefits become
for all its members,
A great deal of pressure has been brough
to b®ar upon the Federal Reserve Board, particu
larly during the early stages of the development
of American bankers1 acceptances, to cause dis
crimination against the acceptances of non
member banks.
So far the Board has been dis
inclined to favor such a policy as it was thought
to be in the general interest of the country to
give encouragement to the freest and fullest
development of this acceptance business, which
is of the greatest benefit to the trade of our
country.
The Board thought further that time
should be given to the State banks and trust
companies to acquaint themselves fully with the
policies tc- be pursued both in dealing with
State institutions in general and the accept
ance business in particular.
Nor does the
collection plan just approved by the Federal
Reserve Board contain any element of discrimi
nation against non-member State banks collect
ing, at par //.ithout cost, their out of town
checks through member banks of the system.
The Board believes, however, that the time has
now come for these large institutions to recog
nize their duty to join the system.
It will
not be long before the banks that stay out of
the system will become conscious of the fact
that member banks will command the greater
1333
681.
10-4 -
confidence, and there is nc doubt that the pub
lic will begin to resent having its interests
sacrificed for the benefit of institutions un
willing to join the general protective system,
and that before long their resentment will have
to be heeded.
Before ©losing, I should like to make it
clear that, though speaking to the New York State
Bankers* Association, whatever I have said is
meant to apply to the State institutions of the
entire country.
I should not wish to give the
impression that I am particularly critical of
the New York institutions.
Quite the contrary,
I am very glad to have this opportunity of tes
tifying publicly to the spirit of good citizenship
that you have manifested in every phase of the
development of the system from the very first
1334
v
beginnings - when we were dealing with the gold and
cotton funds in the fall of 1914,,
In the negotiations,
resulting in the creation of these two funds, there
assorted itself for the first tin® in our financial
history a bread national spirit uniting in a work
of patriotic cooperation national banks, State banks
and trust companies of every section of the country.
That was the first effect of the coming of the Fed
eral Reserve System,
. the physical organization of
which at that time had not even been completed.
Ib
is this same spirit, this larger conception of
banking functions and ideals, that will ultimately
lead into the Federal Reserve System all elements
worth hewing - that is, all elements of financial
and moral strength.
I trust that my frankness will not be
misunderstood by you.
There is an old adage
that "imitation is the sincerest form of flattery."
1335
I venture to paraphase this saying iniot
"frankness is the sincerest form of flattery,
■because it shows that you respect the intelli
gence and moral fibre of your audience.
I believe that our future looms large
beyond measure;
I believe it our duty to be financially
prepared on the broadest possible scale;
I believe that we should use the months
ahead of us; not to expand any further, but
rather to consolidate our strength;
I believe that, through the Federal Re
serve Banks, we should strengthen our hold on
the gold in circulation ana that the stronger
the geld holdings of these banks, the better
shall we be equipped to cope with the problems
ahead of us, of helping ourselves and of help
ing the world;
1336
681.
- 13-A -
I "believe it to be the duty of every bank
in thd country to contribute its share in equipping
cur rlktion for this task;
I believe that State institutions which
are strong enough should cone in now and do their
share, no matter whether or not they are in full
accord with every detail of the Federal Reserve
machinery;
I believe that, as we proceed and gain
in experience, whatever may prove harmful will
be remedied.
The tendency of the country is for
a fair deal for fair people;
While I believe that the country expects
that strong State institutions should do their
duty and join, we are neither begging nor club
bing anybody to come in or to stay in;
But I firmly believe that the future will
1337
681.
- I4-A
belhng to those hanks - national or State that are members of the Federal Resente
System.
Fini3
1338
682
May 26, 1916.
-***
Memorandum for the Board in re
interpretation to he given to
the language "substantial com
petition" as used in the re
cent amendment to the Clayton
Act.
The Clayton Act is entitled BAn Act to supple
ment existing laws against unlawful restraints and monop
olies, and for other purposes".
In so far as it relates to the business of
banking it provides in substance that ( Section 8 ) (1)
No banking association organized or operat
ing under the laws of the United States, and located in a •
^
(
city of more than two hundred thousand inhabitants, shall
have as an officer, director, or employee a private banker
or an officer, director, or employee of another bank lo
cated in the same city.
(2)
The same person shall not be an officer,
director, or employee of two banking associations organized
or operating under the laws of the United States if either
has deposits, capital, surplus, or undivided profits aggre7
gating more than five million dollars.
(3 )
That no banking association organized and
operating under the laws of the United States shall have
as a director a private banker or a director of a state bank
682
-2-
or trust company v\hich has deposits, capital, surplus and
undivided profits aggregating more than five million dol
lars .
There are certain exceptions contained in the
original Act to the foregoing restrictions which, for the
purposes of this note, it is not now necessary to consider.
Considering the general purposes of the Act it
may he reasonably assumed that Congress intended to pre
vent the same person from ^exercising control over two or
more banking associations by serving as an officer, di
rector, or employee of both associations where the exer
cise of such control would have a tendency to destroy or
♦restrain competition between such banks and thus to create
a monopoly.
Having constitutional authority to legislate on
the subject of banks ''organised or operating under the
laws of the United States", Congress undertook to accom
plish this object by prescribing qualifications of offi
cers, directors, and employees of such banks*
It was
evidently due to this fact that the particular language
used in Section 8 was adopted and in considering the pur
pose and intent of Congress this fact should be borne in
mind
682
->
While the purpose of the Act, as its title im
plies and as the context shows, was to prevent unlawful
restraints and monopolies, the particular language used
in Section 8, if construed literally, would prevent the
same person from being an officer, director, or employee
of two different banks under certain circumstances wheth
er or not such banks were in competition*
The effect of the amendment of May 15* 19 l6 ,is
to restore this element of competition as a factor in de
termining under what circumstances the same person may
serve as an officer, director, or employee of two banking
associations.
To illustrate, under the Act as passed the
same person could not serve as a director of two national
banks in the same city of two hundred thousand inhabitants
even though such banks were in no sense competitors. Un
der the amendment of May 15* 1916, however, the Federal Re
serve Board is vested in a discretion to determine first
whether such banks are in substantial competition and, if
not, to permit a person to serve as a director of both
banks*
This amendment provides in terms that -
"Fc.thing in this Act: shall prohibit a n y .:
officer, director,, or employee of any member
bank* or Class C- director of a Federal: reserve bank.,.vh o shall first procure the con.sent of the Federal Reserve Board * ’,* * .*’
from being an officer, director, or employee
of. not more than.;two.other banks * * * if
such other bank * * * is not in substantial,
competition with such-member bank®. "
■
;■ It' is, therefore, necessary for the Board ’
to determine under what' -circumstances two banking asso
ciations located in a city of. more than t w o . h u n d r e d r.
-'
thousand inhabit aits may be'said to; bs in substantial, ...
competition, or when a ^banking association having more
.than five' milli-on dollars in .deposits, •capital,- sur-./*.
plus/ and. undivided prof it3 may be said to be in .suh- .
stantial- competition with another banking-association®
It must be assumed that Congress intended
thi s ’language, to be- given its usual or ordinary inter
pretation®
The definition given, by Webster'of the w o r d -
" competitibn B and adopted in a.number, of cases, is- -
"
"The act of seeking or endeavoring to
gain what another is endeavoring to gain at
•the same time; rivalry; mutual strife for
the same object" (State v®. Port. Royal & A.Ry®
So/, 23 S. E,, 3 6 3 / 5 6 3 , % 5 Si 0, Ul3, (quot
ing Burke v. Big Pour - Ohio.- 22 Wkly. Law.
Bull. lU ).
.3-
682
-5-
In the case of State v« Central Lumber* Co. 121
U. "W*, 50^, the coixrt says •"^Monopoly1 and ’competition* "being the
exact opposites, anything tending to de
stroy competition tends toward monopoly."
The Clayton Act having for its purpose the pre
vention of monopolies, it seems clear that it was intend
ed, as above suggested, to prevent two banks from having
the same officers or directors when such banks are com
peting for the same business.
The word "substantial" was incorporated in the
amendment of May 1 5 , 1916, as a qualification of the word
"competition" and its inclusion was in effect a legisla
tive sanction of the decisions of several of the courts in
cases dealing with this subject.
For example, in the case
Kimball v. Atchison, T. & S. F. R. CO. ( U. S. ) H6 Fed. 888,
890, the court says -
" * * * that when the statute speaks of
competing roads it evident-ly means roads that
are substantial competitors for business; it
refers to competition of some practical im
portance, such as is liable to have an appre
ciable effect on rates, and in that sense the
road to Union was not, in my judgment, a com
peting line."
682
- 6 -
In.the case of the State v. Central of Georgia
R. CO., 15 So E e 17, 18 , 10 q Ga. 7 l6 , U8 L. R. A. 151,
the court says :
’
"The question is, at last> one of fact,
and in its.adjudication in any particular
case the court should be goveriied by the
fundamental principle as to whether there
was such a creation of a monopoly or de
feating of competition as would result in
injury to the public. "
In the more recent case of the Standard Oil Co.
v» United States, 231 U. S» , 1- 6 ^, the court says -
"In substance, the propositions urged
by the Government are reducible to this :
That the language of the statute embraces
every contract, combination, etc., in re
straint of trade, and hence its text leaves
no room for the exercise of judgment, but
simply imposes the plain duty of applying
its prohibitions to every case within its
literal lan guage * * * •
The merely generic enumeration which
the statute makes of the acts to which it
refers and the absence of any definition
of restraint of trade as used in the stat
ute leaves room for .
but one conclusion,
which i3, that it was expressly designed
not to unduly limit the application of the
act by precise definition, but while clearly
fixing a standard, that is, by defining
the ulterior boundaries which could not be
transgressed with impunity, to leave it to
be determined by the light of reason,guided
by the principles of law and the duty to
apply and enforce the public policy embodied
in the statute, in every given case whether
any particular act or contract was wdthin
the contemplation of the statute."See also-
Louisville & Nashville Ry. Co. v« Kentucky, l6l U. S„6jj,6^8
Pearsall v. Great Northern Railway, l6l U. S., 6U6,6j6;
Dady v. Georgia & A. Ry,, 112 Fed-, 838, 8RU;
Rogers v. Nashville, C. '& St. Li Ry. Co., 91 Fed., 299/ 3 ^ /
East St. L. Connecting Ry. Co. v/ Jarvis, 93 Fed., 735/ 7^2/
E. L. & Red River Ry.t/o. v. The State, 75 Tex. ^3^/ % 6 .
It should be borne in mind that the purpose of
the Act is to encourage , or at least to preserve, competi
tion between banks.
The terms of the Act, however, are not applicable
to all national banks but only to banks of a certain size,
or banks located in cities of ft Certain size.
For example,
the director of a national bank in a city of less than two
hundred thousand inhabitants may be a director of any num
ber of other banks located in cities or towns of less than
two hundred thousand inhabitants, provided, none of such
banks has deposits , capital, surplus and undivided prof
its of more than five million dollars.
The theory of the Act appears to have been that
all banks in cities of more than two hundred thousand in
habitants are presumably competing associations and that
every bank with aggregate resources of more than five milmion dollars is presumably a competitor of every other
bank regardless of its location.
The effect of the amend
ment of May 15, 1916, known as the Kern amendment,is that
this presumption nay be overcome by,the facts in any given
case.
On this theory the burden is on the applicant in
each case to show by some affirmative evidence that the two
banks with which he wishes to be connected are not in sub
stantial competition.
The Board is, therefore.; confronted with the dif
ficulty of determining the kind and character of evidence
it wall require to rebut the presumption that the banks
in question are active or substantial competitors.
Generally speaking it should appear that the
two institutions are not seeking the same business- that
is to say, they are not seeking to make their earnings
from the same sources so that the increase of the business
of one should not be expected to have any appreciable ef
fect upon the earnings of the other.
It is accordingly necessary in each case to
consider whether the earnings of one bank are likely to be
appreciably affected by an increase of the business of the
other.
Thi3 necessarily involves a consideration of the
source of the earnings of each bank.
As a general propo
sition a bank’s earnings are derived from those relations
which it has with its customers or patrons. The customers
may be divided into general classes -
±
682
»cu
(1)
The depositors, or those who furnish funds to
the hank*
(2) The borrowers, or those who..pay to the bank in
terest or discount for the use of the bank's
funds#
It is in this respect that the banking business
differs from that of corporations engaged in trade or com
merce.
A manufacturing corporation, for example, derives
its profits from the use of its own funds. Such a corpora
tion is a competitor of others in the matter of the sale of
its products# A bank, however, competes first in procuring
funds or deposits and also in the investment of funds so
procured. To increase its earnings to any great extent
it must increase its deposits.
The Board must, therefore, determine first
whether the two banks are seeking the same class of depos
itors in order to increase their loanable funds, and, sec
ondly, whether they are making the same class of loans or
investments#
In either case the two banks may be competi
tors but it is the degree of competition that must be
determined.
If one bank receives only deposits sub]ect to
check and makes short-term commercial loans and discounts
8
4
8
.1347
1
while the other receives only time deposits or savings ac-counts and does not make commercial loans, the case would
seem to he free from difficulties. Where both banks re-,
ceive checking accounts but one makes commercial loans
while the other does not, the question of competition is
involved but the fadt that both receive the same class of
deposits is by ho ttSahs a cohclusive test*
This question
Can hot be determined solely by the character of deposits
received or the character of the loahs rhade. It is ehtire*.
ly conceivable that both banks may engage in a strictly
commercial banking business and yet may not be substantial
competitors.
■where the bankgare located in different cities
or comnunitiet the character of denosits and character of
loans and rediscounts may be similar and vet the two banks
may not be active or substantial competitors, where they
are doing business in the same general locality, however,
the character of deoo3 its and character of loans and in
vestments become of greater importance in determining the
degree of competition.
•
In a city of two hundred thousand inhabitants
the Board might conclude that taking into consideration
.
6 8 2
1
8
-
-li
the-amount of commercial business in that city every bank
engaged in a purely commercial banking business is in sub
stantial competition with every other bank engaged in the
same character of business.
On the ether hand, in a city of two million in
habitants the commercial business may be of such vol
ume that the question of the ddegree of competition will de
pend upon the location of the banks in the dity.
Banks in
the wholesale district may not come into competition to any
appreciable extent with bahks in the retail district.
It is manifest that each case ifiUst be deter
mined upon the facts submitted and that .no fixed rule can
be prescribed by the Board to govern all cases.
In order to assist the Federal Reserve Agents
in making recommendations, however, the following factors
should >e called to
their attention.
J
First :
As the hanks organized and operating
under the lam's of the United States are engaged primarily in
the commercial banking business, and as such bank is auth
orized by its charter to do a banking business in a. particular
citv, town, or village, consideration should be given to
volume of commercial business engaged in by bank customers
in the -nlace in which the hanks are located.
the
1
8
-f
682
-12-
SeopiiA:
If the two banks ate doing business
in the same general locality special consideration should
be given (1 ) to the character of deposits received as
indicated
(a)
(b)
(c)
(d)
by the amount of deposits subject
to check*
by the stmbunt and terms of time
deposits and savings accounts;
interest paid ;
conditions of deposit - that is
to say* whether an average bal
ance is required;
(2 ) to the character of loans and investmentsmade as indicated by^
(a)
(b)
(c)
Third:
amount.of short term loans and
discounts;
investments in real estate;
investments in stocks* bonds*
and other long time securities.
The capital and total resources of the
two banks may be considered as a factor.
The large bank
may make loans of a size that could not be made by a bank
of smaller capitalization and for this reason they may
serve the same communities without coming into competition
to any substantial extent.
After considering these several factors and after
determining whether the two banks are actual competitors
*?/t19
4
«*
682
-l>
the Board must still determine whether the extent of this
competition brings them within the prohibition of the
statute. To do this, it is necessary to determine what
form of
evil Congress intended to correct. Was it the
purpose of Congress to insure to each bank an equal oppor
tunity to increase its earnings by preventing the directtors of one bank from controlling the operations of anoth
er competitive association, or was this Act intended merely
to insure to the public the benefits to be derived from
actually competing associations?
To illustrate by concrete example, if the same •
directors control two competitive banking associations
they might give preference in the matter of investments
and otherwise to the
one in which they have the largest
number of shares and may in this way deprive the stock
holders of the other from their just proportion of earn
ings.
On the other hand, viewring the matter from the
standpoint of the
public, if there are only two bank3
in a given community and both are controlled by the same
directors preference may be shown to certain customers
in the matter of loans made, interest charged, etc.,
which would not be shown if the two banks were active
competitors for the same business.
1351
682
-1 ^ -
Under the common law contracts in restraint
of trade were void as a matter of public policy and the
so-called anti-trust laws which were amended and supple
mented by the Clayton Act are in a sense a% development
of the common law rule against those contracts which de
stroy competition or restrain trade.
The Board should, therefore, take into consid
eration the effect on the public in reaching a conclusion
as to whether two banks are in substantial competition.
That is to say, it should consider whether any control of
one by the other can affect the public in any way, as for
example, by resulting in a decrease of interest rates paid
to depositors or an increase in interest rates charged on
loans.
It should consider in each case whether the con
trol of the bank by the officers of another can affect
the earnings of either bank, or the business of either in
its relation to the public.
As stated, the burden is on
the applicant to show by affirmative evidence that the
banks are not in substantial competition.
Respectfully,
M. C. ELLIOTT,
Counsel.
6/6/16
W . P. G. HARDING. GOVERNOR
PAUL M. WARBURG. VICE GOVERNOR
FREDERIC A. DELANO
ADOLPH C. M ILLER
CHARLES S. HAMLIN
Ex -O ffic io Mem bers
W ILLIAM G. MCADOC
SECRETARY OF THE TREASURY
Ch a ir m a n
JOHN SKELTON W ILLIAM S
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
WASHINGTON
*688
H .P A R K E R
SECRETARY
SHERMAN P. ALLE N . ASST. SECRETARY
AND FISCAL AGENT
ADDRESS R E P L Y TO
FEDERAL RESERVE BOARD
June 6, 1916.
Dear Sir:
At the meeting of the Federal Reserve Board
on June third., 1916, the question of a re-hearing of
the Connecticut bankers was discussed and I am in
structed to inform you that, while the Board is will
ing to give the Connecticut hankers another hearing
in the month of June if they should so desire, the
Board prefers to postpone such hearing add definite
action until after the summer months.
A new clearing plan is about to be put into
operation and the Board has been assured by those in
charge of the Boston Federal Reserve Bank that every
effort will be made, by making special arrangements
between Boston and New York, to satisfy the conveni
ence of the Connecticut banks *
Under the circumstances the Board would pre
fer to see the results of operation of the new clearing
plan before giving a further hearing, but, as stated
above, in case the Connecticut banks should wish to be
heard at this time in spite of the information above
given, the Board will be pleased to fix the date.
Yours truly.
Governor.
■3
\
684.
June 6, 1916.
MEMORANDUM ON SECTION 8 OF THE CLAYTON ACT.
$o All Federal Reserve Agents:
The provisions of Section 8 of the Clayton Anti-Trust
Act which relate to interlocking hank directorates go into effect
on October 15, 1916.
As originally enacted by Congress, this
Section provided in substance
(a)
That no person shall at the same time be director or
other officer or employee of more than one bank or trust com
pany organized or operating under the laws of the United States,
provided either of such banks or trust companies has resources
aggregating more than $5,000,000.
The phcaae
"organized or operating under the laws of
the United States," has been construed to apply not only to
national banks, but also to State banks and trust companies which
are members of the Federal Reserve System.
(b)
That no private banker or person who is a director in
any State bank or trust company whose resources aggregate more
than $5,000,000 shall be eligible to serve at the same time as
a director in any bank or banking association organized or op
erating tinder the laws of the United States.
It will be noted
that this particular provision applies only to directors and
not to officers and employees.
684.
- 2 -
(c)
That no bank or trust company organized or operating
under the laws of the United States located in any city of more
than 200,000 inhabitants shall have as a director or other of
ficer or employee any private banker or any director or other
officer or employee of any other bank or trust company located
in the same place.
The Act makes certain exceptions to these provisions:
(a)
They do not apply to mutual savings banks not having
a capital stock represented by shares.
(b)
They do not in any way prohibit a person who is a
Class "A" director of a Federal reserve bank from being an of
ficer or director or both an officer or director in one member
bank.
(c)
They do not apply to banks or trust companies where
the entire capital stock of one is owned by stockholders in the
other.
On May 15, 1916, Congress passed an amendment to Sec
tion 8 of the Clayton Act which is intended to make further
exceptions to its restrictions, provided the consent of the
Federal Reserve Board is first obtained.
This amendment provides
that nothing in Section 8 of the Clayton Act shall prohibit any
officer, director or employee of any member bank or Class "A"
director of a Federal Reserve Bank who shall first procure the
.Consent of the Federal Reserve Board from being an officer, di
1355
684
- 3 -
director or employee of not more than two other banks, banking
associations, or trust companies, whether organised under the
laws of the United States or any State, if such other bank,
banking association or trust company is not in substantial
competition with such member bank.
This amendment, which is in the form of a proviso,
does not affect or alter the classes of ineligible directors,
officers, etc,, as defined by Section 8 before amendment.
It
merely provides that a person who is an officer or director of
a member bank may, with the approval of the Federal Reserve
Board, be an officer or director of not more than two other
banks or trust companies, whether State or national, in which
l1® otherwise would have been ineligible to serve, provided
such other banks or trust companies are not in substantial
competition with the member bank of which he is andirector or
officer.
Under the provisions of this amendment it will be
necessary for every director, officer, or employee of a member
bank to apply for the approval of the Federal Reserve Board to
serve as a director, officer, or employee of any other bank or
trust company which comes within the inhibitions of Section 8
of the Clayton Act and which is not in substantial competition
with his own bank.
In this connection it may be mentioned that
if a director of a member bank desires to serve as a director of
two State banks or trust companies which are not members of the
Federal Reserve System, the sole test is whether such other State
banks or trust companies are in competition with the member bank
and it is inmaterial whether they are in competition with each
other.
The Federal Reserve Board, before passing upon these
applications, will in each case call upon the Federal reserve
agents for a report.
It will, therefore, be necessary to lay
down for the Federal reserve agents certain broad lines that will
be observed in dealing with these applications.
The most important task will be to define what the Board
will consider "substantial competition".
Perhaps it may be the easiest way of approach to con
sider and decide first what shall not constitute "substantial com
petition".
Answering this question, it should be said that the mere
fact that two banks ("bank" hereinafter will include national banks
trust companies or State banks) are in the same locality or of
similar size, or that they both belong to the same class of "banks"
or that they both are buying commercial paper or securities, or
take deposits, or are doing a trust company business, does not
constitute "substantial competition".
If the mere fact that two
banks are taking deposits or are buying commercial paper or bonds
should be considered to be "substantial competition", it would be
57
684
-
5 -
paramount to excluding directors, officers or employees (herein
after called "directors") from serving on any other "hank", because
they all would be in "substantial competition".
The question is, then, not on the broad character of the
functions exercised by these banks, but the determining point of
criticism must be the extent and manner in which these functions
are exercised.
Two men in the United States each wanting a glass of
water can not be s&id to be competing with each other where they
are standing on the banks of a stream affording sufficient water
for all.
If, on the other hand, two men in the desert need water,
there will indeed be very substantial competition for a single
glass of water, the supply being limited to that amount.
Two such extreme cases are fairly obvious.
The question
becomes more difficult of determination, however, as the facts in
each case converge from those extremes.
Take, for instance, a
community supplied by a single reservoir of water.
Though
there may be an ample amount for all, it is apparent that severe
competition or a tendency to monopolize may result from an effort
on the part of one to succeed in supplying himself plentifully at
the expense of the others, securing thereby a stronger position
either for fixing the market price of the water or for arbitrarily
discriminating in offering or permitting its enjoyment.
In dealing
thep,first with the object competed for it is clear that if it is
of such broad and general nature and existing in such gehehous
supply that it may be considered a general commodity with a wide •
market, the mere fact that two banks require such commodity
would not make them competing.
It would make them competing
only if the comnodity which they both desire and can reach were of
so restricted a nature that, in trying to acquire it, they would
materially affect each other's supply.
In other words, where
both banks take the same kind of deposits, buy the same kind of
paper and securities they must for a substantial portion of
their regular business be tapping the same limited or individual
field in order to be considered as substantially competi:~.
This test should apply irrespective of the location of
the two banks in question, though the distance from each other may
be an important factor in determining how much each depends upon
the same sources of supply.
There may be the same class of
banks not remote from each other - conceivably in the same city which do not compete because the main business carried on by them
may be of an entirely different character.
The one may be in
the business center, taking business accounts and making business
loans and not paying interest on deposits; the other may be an
up-town bank, having private accounts, not making business loans
and paying interest on deposits of individuals.
It is well con
ceivable that such two banks may be considered as not in sub
stantial competition, even though, for certain investments,they
•1359
might have to resort to the same class of investments, but
find them in broad market, such as call loans, time loans or
commercial paper,,
It is possible, on the other hand, that banks of the
same class, even though remote from each other, might be doing
substantially the same kind of business, and might, therefore,
be competing in precisely the same fields and for the same com
modities.
Such banks are those whose business are so important
in scope that they reach into far-distant territories.
To
illustrate, certain large banks in Chicago and New York, for
instance, have ceased to be local institutions.
They are banks
that have their connections all over the country, that compete
with one another in dealing with the deposits of large corpor
ations in purchasing their securities, and it is conceivable that
such large banks with such ramifications may be considered as
competing oven though geographically remote from each other,
while two smaller banks in the same cities doing substantially the
same character of business would not be held as competing.
The
degree of such competition must depend upon the facts of each
case, and whether the banks in question are "in substantial com
petition" must be decided by the Federal Reserve Board after a
review of such facts and the recommendations or report of the
Federal reserve agent.
ty
»
ft
684.
-
8
The Board proposes to adopt the method of advising
each Federal reserve hank of the applications made by each di
rector.
To 'illustrate,, if a Philadelphia director should wish
to retain a directorship in New York andj at the same time, one
in Chicago, all three Federal reserve agents will be advised of
the three directorships involved in the case.
They will be re
quested particularly to investigate the local concern involved
in the application and will all three receive copied of the re
ports of their fellow Federal reserve agents, so that they will
be in a position to study the entire case before making theih
recommendations.
The Federal Reserve Board's special committee,
after having heard from all Federal reserve agents involved in
the application, will make its final recommendation to the Board.
6 / 6 / 16/
1381
691.
LETTER FROM A WORCESTER. MASSACHUSETTS■ NATIONAL BANK.
Referring to the Par Collection System which you are to
put in operation about July 15th, I have no doubt you are hearing
from a great many banks who are against the adoption of this system,
but hear very little from the many banks who are in favor of it. Some
of the Texas bankers are back of a propoganda to stir up all the banks
of the country in opposition to the Par Collection System.
The banks in New England, are much in favor of the adoption
of this system for the reason that, in New England something similar
to this was adopted several years ago by the Boston Clearing House,
by which all country banks remit to the Boston Clearing House at par,
as you knowi
This has been very successful and very satisfactory to
the country banks as.well as the city banks.
I well remember the opposition of some of the country banks
at that time. Their arguments were the same as the Texas bankers are
making now, - that they were going to lose the exchange charges which
they were making.
They did not seem to figure that these items would
be made up by their not having to pay exchange on items which were de
posited with them on other- banks.
In fact, many of them did not re
alize that they "were paying exchange, for their city correspondents
were taking out several days* time which amounted to the same thing.
I trust you will not be deterred by this opposition which,
as I understand, comes from the Southwest, and I venture to predict
that after it has been in operation for a year, they will all realize
that it is a good thing for all.
6/7/1916.
CHARLES S . HAMLIN, GOVERNOR
FREDERIC A. DELANO, VICE .GOVERNOR
PAUL M.WARBURG
W. P. G. HARDING
ADOLPH C .M IL L ^ I^ ^
Ex -O f f ic io m e m b e r s
WILLIAM G. McADOO
S ecr etary of th e T r e a su r y
CHAIRMAN
JOHN SKELTON WILLIAMS
FEDERAL RESERVE BOARD
Co m p t r o l l e r o f t h e c u r r e n c y
H. PARKER WILLIS, SECRETARY
SHERMAN P. ALLEN, ASST. SECRETARY
A D D R E SS R E P L Y TO
WASHINGTON
FEDERAL RESERVE BOARD
June 9, 1916 .
Dear Sir:
Inquiry has teen made as to what changes will he neces
sary in Form 3 ^ in order to provide for the new general ledger
accounts which may have to be opened on July 15 , in connection
with the new Clearing Plan.
The Board at this time is not prepared to issue de
tailed instructions regarding the matter, leaving it to the judg
ment of the banks to open such additional general ledger accounts
as may be necessary properly to record and report the collection
operations of the bank.
In order to insure uniform treatment
and classification of the items, it is suggested, that in pre
paring the Daily Bank Statement (Form 3 ^) and the weekly tele
graphic reports, the accounts named below be composed as fol
lows :
RESOURCES
l:Due from Other Federal Reserve Banks", (Code
word "BARE")
This account should show the gross amount of
items forwarded to other Federal reserve
banks for collection and credit.
"Due from Banks and Bankers", (Code word "BISE")
This account should include items sent to •
non-member banks for collection and remit
tance.
"Deferred Debits (Transit Account)", (Code word
"BUMP")
Items which have been sent to member banks for
collection but which have not been charged to
the account of member bank on the books of
reserve bank.
LIABILITIES
"Due to other Federal Reserve Banks" (Code word
"CHOP")
1363
694.
- 2
This account should include the following items:
(a) Balance of funds collected,
(b) Deferred credits to other Federal reserve
banks. Items received upon which credit
is deferred.
Accounts (a) and (b) to be shown separately in
Mail Reports (Form 34) only.
"Due to member banks", (Code word "CLAY")
Gross amount of balance and items received f'Or
credit of member banks.
"Deferred Credits - Member banks", (Code word "CORK")
Items received but not credited to the account of
member bank on the books of the reserve bank.
The amount upon which reserve is to be computed will be
ascertained in the same manner as at present; namely, subtracting
"Total deduction from Gross Deposits" from "Gross Deposits", as
shown in Form 34.
. For the information of the Division of Statistics, you
are respectfully requested to furnish the following:
1.
Half a dozen copies of all circulars sent to banks in
connection with the collection system which wall be
inaugurated July 15«
2*
Description of method of recording on books of the re
serve banks:
(a) Items on member banks;
(b) Items on non-member banka collected through member
banks*
(c) Items on non-member banks sent direct for collection
and remittance;
(d) Items on member and non-member banks sent to other
Federal reserve banks for collection and credit.
3*
Information as to additional general ledger accounts which
wall be carried to cover clearing operations.
4.
Whether daily statements to member banks will show gross
balance or net balance.
Respectfully,
Assistant Secretary
PS4
699
Washington, D. C., June l6, 191&*
First Draft.
A CONSIDERATION OF THE MERITS OF THE
QUESTION AS TO WHETHER FEDERAL RESERVE NOTES
SHOULD OR SHOULD NOT BE ACCEPTABLE AS
RESERVE MONEY.
I
The Federal Reserve Act provides that Federal Reserve notes
should not he accepted as reserves for national banks.
Presumably the
reason the framers of the Act had for making this restriction may be
briefly stated as follows:
(l)
Federal reserve notes are intended to exist solely as an
elastic credit currency which shall expand and contract in volume with
the demands of commerce.
There is no question whatever about the good
ness of Federal reserve notes.
(a)
They are good because they represent 100 per cent of
high-grade commercial paper, endorsed by a member bank;
(b)
Because there is carried by the issuing bank a reserve
against them of at least 40 per cent of gold;
(c)
They are a first and paramount lien against all the
assets of- the issuing bank, which bank is guaranteed
by its stockholding members by a provision for double
liability upon their stock;
(d)
The notes are guaranteed by the United States Govern
ment; that is, they are an obligation of the Government.
Notwithstanding these reasons, the framers of the Act might
very properly say that though the notes are amply protected, there should
be no confusion of ideas between the goodness of the notes and their
availability as reserve;
-
-
*r
699.
- 2
(2)
The view of those who "believe in authorizing the Reserve
Banks to issue a credit currency is that the reserves of the issuing
banks must be absolutely above and beyond reproach; that is„ to say,
they must be metallic reserves,, either in coin, or the representative
of coin,
(3 )
The only guarantee against a possible inflation of a
credit currency rests upon its redeemability when it is no longer
required*
II
6n behalf of those opposed to the above views,that is, the
opponents of this provision of the Act, and those who believe that it
is proper to let Federal Reserve notes be counted as reserves by member
banks, the following statements may be made to epitomize the arguments:
1st:
They concede the desirability of having the currency
elastic; but they say that because Federal Reserve notes have been
emitted by &. bank in times of currency demand does not in any way pre
vent a contraction of the currency, when the reverse is true, even
though the notes emitted remain in circulation.
Indeed, it may be
argued that the framers of the Act had this very thing in mind.
Sup
pose, for example, $100,000 of notes are issued for $100,000 worth of
three months’ commercial paper:
at the expiration of the three months
the member banks who endorsedthe paper, and received the credit, pay
JL366
699
it off at the Federal Reserve Bank.
*
There is no certainty, however,
that the $100,000 worth of notes put into circulation would thereupon
return to the issuing hank simultaneously, and the issuing hank is in
different -whether they return or not, provided it has received $100,000
in gold or the equivalent, which it may hold as an offset to its own
notes still in circulation;
2nd:
The opponents further argue that,- granting all the ar
guments of the framers of the Act, they will say that they are con
fronted hy a condition and not a theory*
conditions are at the present timei
Let us consider what these
National banks> represented in
round figures hy 7600 individual hanks, about one-third of the total
number of hanks in the country having deposits equal to about one-half
of the total of hank deposits, are permitted at the present time to
count as reserves the following:
(a)
Gold or gold certificates;
(h)
Silver or silver certificates. (Silver may he
considered to he from forty to fifty per cent
Government fiat).
(c)
Greenbacks; (the direct obligation of the Gov
ernment, supported by thirty-five per cent of
gold; therefore, representing sixty-five per
cent fiat).
On the other hand. State hanks are permitted very generally
to count as reserves Federal Reserve notes and National hank notes.
It is therefore argued that if it is proper for National hanks to count
as reserve silver and silver certificates, which are from forty to
fifty per cent Government fiat, and greenbacks, which are sixty-five
per cent Government fiat; or, if it is safe and proper to permit State
1
8
6
699.
- U -
tanks to count National tank notes, supported wholly ty the direct
otligations of the Government (U. S. bonds), it is rather atsurd to
say that National tanks shall not te permitted to count as reserve
Federal Reserve notes which are not only better supported than any
other currency except gold and gold certificates, but are, in addi
tion thereto, the direct obligation of the United States Government.
3rd:
Viewed from the standpoint, even of credit currency,
it is illogical to permit a National tank to count as reserve a credit
obtained through the rediscount of commercial paper, entered upon the
books of the Federal Reserve Bank as a deposit and as such transfer
able anywhere
and convertable at the will of the depositing bank
into cash or gold, while not permitting them to count as reserve a
similar credit taken in the form of Federal Reserve notes;
1+th:
If the experience of the last fifty years of American
banking means anything, it means that member banks will generally take
credits from their rediscount operation in the form of book credits,
rather than in the form of currency.
The smooth and successful work
ing of a general clearing system will certainly aid greatly in bringing
this about;
5th:
It must be borne in mind that the Federal Reserve Banks
do not control the situation.
It is to be hoped that they will in
time do so, but as yet, and so long as the National banks only repre
sent one-third of the total number of banks numerically and one-half
of the total deposits, it is obvious that they will not control and
7
1388
699-
therefore that we must take into consideration the existence of the
State hanks.
So long as Federal Reserve notes and National hank notes
can he counted as reserve hy State institutions, it must he admitted
that that fact alone gives a great advantage to those institutions,
while it throws upon the Federal Reserve System the burden of printing
and emitting the notes and the responsibility of Sustaining the credit
of the country;
6th:
Furthermore, there is a condition which applies to all
National hanks which is open to serious objection; to wit!
sorting out of different classes of currency.
the constant
For example, a National
hank keeps at the base or foundation of its reserve fund gold and gold
certificates.
icates.
Next above this will come the silver and silver certif
Next, the greenbacks*
These three kinds of money, or sub
stitutes for money, may be all classed as legal reserves, but, in ad
dition to this, the bank may find it necessary to use three other forms
of currency:
National bank notes, Federal Reserve Bank notes, and
Federal Reserve notes.
In times of active demand for money,
when
*
banks are holding little, ii anything, in excess of their minimum of
reserves it becomes obviously necessary to push out this other currency,
which can not be legally counted as reserves.
If equally times come
the effect of this policy is at once to cause the general public to
differentiate between the various kinds of currency, and some times
this differentiation goes to the extreme of hoarding the lawful reserve
money, and pushing out currency which is not reserve.
It is in times
1369
like these that Stave hanks, while having the advantage of calling
any kind of currency reserve, may at the same time, serve the useful
purpose of enabling National hanks to get rid of the currency which
is not reserve - at least an anomalous situation.
7th:
Those who are strongest in favor of counting Federal
Reserve notes as reserves, even if it is only to a limited extent, point
out that it is not proposed to let Federal Reserve notes he counted as
reserve by the issuing Reserve Banks nor hy any other Federal Reserve
Bank.
They admit that such a policy would he had and would run counter
to the general principles of credit currency.
They further argue that
to permit Federal Reserve notes to he counted as reserve to a limited
extent hy National hanks in the Districts where issued is not dangerous
because the Federal Reserve Board has, through its control of the re
discounting privilege, an absolute control of the .emission of such
currency.
If, instead of only twelve hanks of issue, there were 100
or more, it is quite conceivable that the issue power might lead to
enormous inflation, hut considering that this power is limited to 12,
at the most, and considering the control of the Federal Reserve Banks
over "the rediscounting privilege, it is, they argue, perfectly safe
to permit member hanks to count as reserve to a limited extent Federal
Reserve notes of their own Districts.
8th:
It is a notorious fact that in ordinary times all forms
of currency pass readily as of equal value and it is only in times of
stress that real money, such as coin, becomes of special value as the
basis of credit currency.
Based on this fact it is urged that it is
•1370
699- 7 -
wise for the Central or Regional Banks to accumulate or impound gold.
Thus a Reserve Bank which may have emitted one million of Reserve notes
may at the end of three months have its rediscounts paid off in gold or
the equivalent.
It is wiser., it is argued., for the hank to keep out
its notes and hold the gold than to pay out the gold and retire its
notes, for the reason that the gold is of greater potentiality in
times of trouble.
9th:
Fdr obvious reasons it is most important that every
thing in reason should be done to strengthen the regional banks, as
reserve institutions.
As has been often said, the Aldrich-Vreeland
Act was an adequate scheme for the issuance of currency in times of
stress.
The Federal Reserve Act,on the other hand, aims to accom
plish far more than that and not simply to act as an emergency bank
even though amply endowed with currency issuing functions.
It seeks
among other things to accomplish the important function of steadying
and equalizing interest rates and fortifying the country in advance
against possible or sudden market fluctuations or heavy withdrawals
of gold, due to changes in trade balance.
If you permit the Federal
Reserve Banks, it is argued, to reinforce themselves with gold in
times when maney is abundant, they will be the better able .to act as
shock absorbers in times of stringency, or great demand.
,1371
699
*
III
In conclusion, after giving the matter very full consideration,
it is "believed that Congress may safely grant National hanks the right
to count Federal Reserve notes of their own district as reserves* to the
extent of say one-quarter or one-third of the reserves required to he
held in their own vaults.
It is believed that the effect of such a provision will tend
to strengthen the Federal Reserve Banks and cause a gradual flow of
gold to them.
It is further believed that in times of actual demand for
credit, when National hanks are running close on reserve, they will not
hesitate to take Federal Reserve notes; whereas, if they are not per
mitted to hold Federal Reserve notes as partial reserve, there wall he
a disposition to regard Federal Reserve notes as inferior to other forms
of currency.
Furthermore, if, in the opinion of Congress, it is desirable
gradually to replace National hank notes with Federal Reserve notes, it
can he accomplished far more easily if Federal Reserve notes can he
counted as reserve.
F. A. DELANO
@FedFRASER