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EX·OFP'ICIO MI:MBERS W. P. Ia. HARDING, GOVERNOR PAUL M. WARBURG, VICE GOVERNOR FREDERIC A. DELANO ADOLPH C. MILLER W1LLIAM Gl, McADOO SECRETARY OP THE TREASURY CHAIRMAN X'72'1C:HARLES s. HA~ JOHN SK~LTON WILLIAMS COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD H. PARKER WILLIS, SECRETARY SHERMAN P. ALLEN, ASST. SICRITARY AND FISCAL AGENT WASHINGTON ADDRESS RRPL.Y TO FEDERAL RESERVE IIOARD February 13, 1918. Dear Sir: I enclose herev·dth copy of a std.tement zwde to the Federu.l Reserve of the Kans<o~.s to charges for Si:4S Bo~;~.rd City here todd.y, presented by a Committee Cle<o~.ring exch<o~.nge House Associ<o~.tion in reg~;~.rd py the Federa.l Reserve Bu.nk of Kd.n- City. The like to stt~.tement ht~.ve, <o~.S First: explo;iins itself d.nd the Board would soon a.s convenierlt, "" report from you on As to the justice of the proposa.l. Second: As to whether conditions similc;~.r to those disclosed exist in your District. Third: As to the fe~sibility of mt~.king "" gener~l rule the lines suggested; for ex.a.rnp1e, thi;;lt New York excho.nge sht~.ll be t""ke:r: <o~.t pc::.r v.-hen it is td.ken in puyrnent of checks h.earing New York endorsements, and t""ken at ~ discount when ti;l.~to build up btLlances in tha Federal Reserve Bc..nk. t~.long Enclosure. Yours very truly, Chairman, Committee on Cled.ring. .. X':/27-a :WJCmoro.ndurn of a Presentation to the Federtil Reserve Board by Ci Committee of the Kansa.s City Clearing House Association Februtiry 13, 1918· Prior to January 1st, 1918, the Federal Reserve Bank of Kansas City received from member banks, dro.fts on Chicago and St. Louis at par, and on New York <:i.t lOy. per thousand discount. The principle which un·derlay discounting New York exchange was not considered; as it was evi~ dent that the Federal Reserv·e Bank must protect itself against being given the least desirable efichtinge, and the discount seemed the logical way to tiCcomplish it. Discount rates based on approximately 21c interest charge fot time in transit, were established the first of the year, and the member banks have felt very keenly the serious effect upon themselves, though, in the press of abnorma.l business, had hardly set about studying the problem when the information th<:i.t discounts were to be largely increased -doubled, in fact -- rni:ide prompt action imperative. The jealousy of the Federi:il Reserve Board for the Reserve strength of the twelve banks is fully shared by all of us, and the last bit of gold in our vaults has gone into your hi:inds in evidence of our support. But we do not believe thttt the Board has realized that, by the present and contemplated regulations, they are taxing the members in our district for the benefit of those in other districts and without Ciffecting the total reserves of the twelve banks~ p~rticle· It will be recalled that the Tr~nsit Department of the Federal Reserve Bank at one time attempted to collect country items on the following basis: Items were sent to country b~nks i:ind the i:imounts thereof were charged to their reserve accounts on the day on which the items reached them, according to schedule. Correspondingly the endorsers on the ite::ns received credit for them in their reserve accounts on that date. Operation of this plan disclose~ the unfairness of it and the practice was abandoned, so th~t items are not now charged to the bank sent until the completion of the schedule covering the time to that bank and returns from that b~nk to Kansas City, with~ correspondingly lengthened sched~le in the period before the endorser receives credit in his reserve ac~ou:1t, The second pl~n h~s not chan 6ed the reserve strength of the Federal Reserve Bank, but it has placed the whole burden of time in tr~nsit on t.he endorser, where it belongs, ~nd not in any p~rt on the pttying bi:ink, where it should in no w~y fi:ill· It o·;curs to us tha.t the present pr.:..ctice of the Federal Reserv~ i.ank in hci.ndling items from outside of the district, is practically the 2 X72'7-o.. e~uivo..lent of the plan which is described o..bove as ho..ving been tried and abandoned. For exo..mple, items on Ko..nso..s City deposited with the Federal Reserve Bank in New York, dre sent to the Federo..l Reserve Bo..nk in Kansas City, which clears them, getting o.. credit bdlo..nce in the Clearing House, for which immedio..te ~yment must be made· In the nature of things, it is impossible for Kdnso..s City bdnks to ho..ve o.. sufficient supply of cash on hand to mo..ke these settlements, except in occo..sional instances. Kansds City bears the same business relo..tionship to New York which a country town does to Kansas City. For pro.ctical reasons, which need hardly be argued, it is necesso..ry that banks there should have bo..lances in Eastern cities. (More than ever is this true at present, because of the immense governmental and internationo.l o..ctivities concentro..ted at the Eo..stern seaboard.) Therefore, they are obliged in pro..ctice, to pay for the items on themselves, received by the Federdl Reserve Bo..nk from out of the district, in Eastern Excho..nge. The endorsers thereon receive credit in reserve account, the day the items o..re pdid in Kansas City, o..nd Ko..nsas City banks are forced to carry the interest burden from the day paid there until payment on their Eastern ExchC4nge co..n be realized by the Federa.l Reserve Bank. In other words; they are, in effect, obligea to pay for items by wire transfer to New York, the do..y the items reach Kansas City. In fact, that is the alternative pointed out if objection is ITade to paying the discount. The New York endorser is not entitled to receive payment on Kansas City items the day of payment there, any more than K1:1nsas City banks are entitled to receive payment on Salina items sent through the Federal Reserve Bank the day they reach Salina.. We o..re therefore submitting that the burdening us with an interest charge co..lled discount, on the Eastern Exchange, which we give in settlement of Eastern endorsed items on ourselves, is unfdir. If the Federal Reserve Boo..rd feels that the system can not c1:1rry ""ny float on transfers from one Federt~.l Reserve Bi:i.nk to another, their remedy, in this instance, lies in lengthening the time which they will require for crediting Kanso..s City items to the account of the endorsers to the Federal Reserve B~nks in New York, Chico..go, St. Louis, etc. It should take longer for New York to collect Ko..ns~s City checks tho..n Buff~lo checks. V~dt is true of Kanso..s City items is similo..rly true of items on interior b~nks in this section. If the Federo..l Reserve B~nk receivesitems on Sdlin~, Ko..ns~s, from New York, sends them to Salina for colle~tion, the bank at Salino.. will send in payment therefor, Kanso..s City exchange, or will build up their legal reserve bo..l~nces to ~ corresponding extent larg~ ly with ~nsas City excho..nge, so tho..t the burden of tr~nsferring money from S~lina to New York ~lso falls chiefly on ~nsas City banks. The endo~u~r im New York will therefore hdve received the returns on o.. Salin~ item in the time it h~s taken to send th~t item to Salino.. from New York vi~ Kansas City, and returns to get baok <...s fa.r c.~.s K<:lnS<iS City. The time it t ... kes , .~ 3 X727-a for the returns to go from KCJ.nsa.s City to New York is po.id for by the KanSd.S City banks, a.nd not by the endorser to the New York Federd.l Reserve Bo.nk. In simila.r munner is the burden J.aid on bc.nks in other Reserve cities in District 10, ··-St. Joseph, Cmc!.ho., Denver, VJi"Lito., Oklo.borna City, Muskogee, etc., jn settling for Eastern endorsed items on themsel-.res and their country correspondents. If the c~.rgume nts o.bove c~.re conceded to hi:ive merit, bar.ks in t:~.-·..:s district should have the pz·ivilef!,e of paying the Federal Reser1e Bank :Z ur such items a.s it receives from out of this district in out of the distr2ct funds, particuleirly for those items which come from tb..e reser·.re centers East of here, whe~e bo.lances from this district accumulate in the neitural course of business. The Federci.l Reserve BC4nk cleared on Ki::lnSc.cs City bc<.nks during the year 1917 ••••.•......•..••....•.•...•.............•...• $1,356,864,914-17 Ka.nsd.s City bci.nks cleared on the Fe de rc;.~.l Reserve Bci.nk •• __..:;5..:;6~J.:.z:,..:;6:.;;:0;..::::8:.z:,:.;;:9..:::2:.:::2:.;·..:.9.;..7 mak:i.ng the net credit of the Federi::ll Reserve Bi::lnk in t!1e Clearing House, • ....• ~ • •.•...••.•.••••.. - • ..• - • •.....•.• $ 795,255,991.20 The Federei.l Reserve Bcink of Kb.nsc;.~.s City received from other Federal Reserve &nks during the year 1917, on Kci.nsas City bci.nks,. $ 583,519,316-16 and on other banks in this district, ................... 370,4JS,J.9'7<72: · Totci.l 1 $ 953,934,4~3.88 This exceeds the amount of their credit bi;i.leinces in the Keinsas Clearing House by about $158,000,000-00, which no doubt represents the approY~ mate d.mount of out of the district exchanges pctid to them by banks outside of Kansas City. It is i::lppci.rent tha.t banks in the Tenth District have not been borrowing money by selling the Federal· Reserve Bcink Eastern E~~change. They have only asked to pay in Eastern Exchange by m~il, and 22i by wire, for the items on themselves collected through the Fede:co.l P::;ser;,re Be;:J~>:s for Eastern endorsers. To enforce the proposed reguleition would cost banks in the Tenth District c;.~.t le<:.<.st $125,000 a year, probably much more than that. The Federal Reserve Bunk of Kci.nsas City does not seek to make th... t profit, a.nd its stockholders do not desire it. The apportionment of the tota.l amounts of Eastern Exchange the Federi::ll Reserve Bunk of Kansas City will receive at pi::lr from various ;nembers, is purely a mechanical problem, once the principle is aeknowlec.l.gnd. We do not ask thd.t the Federal Reserve Bc;.~.nk receive Eastern Exchange at par, exce.E.t for Eastern endorsed items. In other wordst we do not <:4Sk you to loci.n, without charge, on our dra.fts due in New York, Chicago or St. Louis, in one or two days; we only ask tho.t you refrain from forcing us to wire payment to Eastern cities, so eiS to cut in two the interest cost to them for Western items. 4 If we are forced to charge customers high rates of discount on all Eastern items deposited, or else on all their checks sent East, which cost us to settle for, their confidence in the pr.i;!mise of the Federal Reserve Bank will be shaken; for it hds led them to expect reductions, not increases, in charges on checks. Years of astablished practice as well as the natural course of business have given Eastern Exchange a v~lue in the eyes of the public. To change this will require a long while and much patient e~planation of poli~ias adopted by the Federal Reserve Board, <:tnd not understood by b~nkers themselves· If it is ever t·o be done, this is not an opportu:l8 moment.
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