The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FEDERAL RESERVE BOARD WASHINGTON address official correspondence to the federal reserve board X-6759 November 13, 1930. SUBJECT: Reply to L e t t e r from P r o f . Westerfield. r e C o l l a t e r a l Loans. Dear S i r : R e f e r r i n g to the Board's telegram of October 23, t h e r e i s a t t a c h e d h e r e t o copy of a l e t t e r which Governor Meyer i s today forwarding to Mr. Ray B. West e r f i e l d of Yale U n i v e r s i t y i n r e p l y to h i s questionn a i r e of October 15, regarding c o l l a t e r a l l o a n s . I t would seem t h a t a f u r t h e r r e p l y to P r o f e s s o r Westerf i e l d ' s l e t t e r by the i n d i v i d u a l Federal reserve banks, w i l l not be necessary. Very t r u l y yours, E. M. McClelland, Assistant Secretary. Enclosure, TO CHAIRMEN OF ALL FEDERAL RESERVE BAMS 3 8 2 COPY X-6759-a November 13, 1930 • Mr, Ray B. W e s t e r f i e l d P r o f e s s o r of P o l i t i c a l Economy Yale U n i v e r s i t y New Haven, Connecticut Dear Mr. Y / e s t e r f i e l d : Your q u e s t i o n n a i r e to c e r t a i n of the Federal r e s e r v e agents r e l a t i v e to c o l l a t e r a l loans has been r e f e r r e d to the Board f o r r e p l y . Our r e p l y to your i n q u i r y has r e f e r e n c e to the t r e n d of member hank loans secured "by stocks and "bonds, as there i s no adequate information r e garding loans on o t h e r c o l l a t e r a l , nor on loans by nonmember banks. The p r i n c i p a l f a c t o r s underlying the growth during r e c e n t years in the p r o p o r t i o n of member bank loans that i s r e p r e s e n t e d by loans on s e c u r i t i e s a r e b e l i e v e d to be the f i n a n c i a l p o l i c y of c o r p o r a t i o n s and the growth i n p u b l i c p a r t i c i p a t i o n i n the stock market. In the r e l a t i v e l y easy money market conditions p r e v a i l i n g i n r e c e n t years and with the high l e v e l of c o r p o r a t e earnings, c o r p o r a t i o n s found i t both d e s i r a b l e and p o s s i b l e to provide themselves with a l a r g e p a r t of t h e i r working c a p i t a l from p r o f i t s and from the i s s u e of s e c u r i t i e s r a t h e r than through borrowing a t banks. This p o l i c y has been f a c i l i t a t e d by the i n c r e a s i n g w i l l i n g n e s s of the p u b l i c to buy common stocks during a p e r i o d of r i s i n g s e c u r i t y p r i c e s . This development has operated both t o reduce bank borrowing by c o r p o r a t i o n s on l i n e - o f - c r e d i t loans and to provide the p u b l i c with s e c u r i t i e s e l i g i b l e as c o l l a t e r a l f o r s e c u r i t y l o a n s . An important f a c t o r i n the increase of s e c u r i t y loans during the p e r i o d from 1922 to 1929 has been the growth of s p e c u l a t i o n i n l i s t e d stocks, which Mr, Ray B. W e s t e r f i e l d 2. Xr6759~a r e s u l t e d i n a growth i n the demand f o r loans by "brokers. 1 *" C j The ease with which loans to brokers could "be n e g o t i a t e d was i n i t s e l f a f a c t o r i n the growth of s e c u r i t y l o a n s . Judging "by the member bank r e p o r t s f o r the system a s a whole the change appears to have a f f e c t e d a l l c l a s s e s of banks. You w i l l f i n d some d a t a on t h i s s u b j e c t i n the Board's Annual Report f o r 1928 (Table 52) and 1929 (Table 44), a l s o i n r e c e n t i s s u e s of the Member Bank Call Report, of which copies f o r June, 1929 and June, 1930 a r e enclosed. Corresponding data a r e not a v a i l a b l e p r i o r to 1925, and they have not been assembled s e p a r a t e l y f o r the d i f f e r e n t c l a s s e s of banks i n each d i s t r i c t . A special t a b u l a t i o n t h a t may be of i n t e r e s t to you w i l l appear i n the forthcoming November i s s u e of the Federal Reserve B u l l e t i n . The Federal reserve banks have done nothing whatever to encourage member banks to increase the p r o p o r t i o n of t h e i r s e c u r i t y l o a n s . On the c o n t r a r y , the d e s i r a b i l i t y from the p o i n t of view of member banks of having a l a r g e p a r t of t h e i r loans i n the form of paper e l i g i b l e f o r rediscount a t the r e s e r v e banks has been an i n f l u e n c e a g a i n s t the growth of s e c u r i t y loans which a r e i n e l i g i b l e . The p r e f e r e n c e of member banks f o r e l i g i b l e loans i s r e f l e c t e d i n the f a c t t h a t customer loans on s t o c k s u s u a l l y bear a higher r a t e than other customer loans, as can be v e r i f i e d by r e f e r e n c e to the t a b l e of r a t e s charged customers t h a t i s p u b l i s h e d r e g u l a r l y i n the Federal Reserve B u l l e t i n . According to our information, a s f u r n i s h e d by the Federal r e s e r v e agents, i t i s not customary in any Federal r e s e r v e d i s t r i c t f o r banks to " i n s i s t on c h a t t e l mortgage or o t h e r s e c u r i t y f o r p r a c t i c a l l y a l l of t h e i r l o a n s . " Enclosures Very t r u l y yours, Eugene Meyer Governor
@FedFRASER