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FEDERAL RESERVE BOARD
WASHINGTON
October 1, 1921.
X-3217
SUBJECT:
F u r t h e r Correspondence w i t h Governor of
Nebraska.
Dear S i r :
On September 1 7 t h I s e n t you copy of c o r r e s pondence w i t h t h e Governor of Nebraska.
I now e n c l o s e
f o r y o u r i n f o r m a t i o n copy of r e p l y which h a s been r e c e i v e d from Governor McKelvie and copy of my answer
thereto.
Very t r u l y y o u r s ,
Enclosure.
Governors of a l l F.R.Banks.
G o v e
r n 0 r.
x-32r?a
September 29. 1921.
Dear Governor McKelvie:
Last Saturday I acknowledged r e c e i p t of your l e t t e r of t ' e 22nd
i n s t a n t and i n r e p l y i n g to i t now a t g r e a t e r l e n g t h I wish t o i n v i t e
your a t t e n t i o n t o some of the u n d e r l y i n g p r i n c i p l e s of the F e d e r a l
Reserve Act which govern the o p e r a t i o n s of t h e F e d e r a l "reserve "banks,
Following t h a t I w i l l submit some f a c t s r e l a t i n g t o t h e o p e r a t i o n s of
the Branch of t h e F e d e r a l Reserve Bank: of Kansas City a t Omaha, i n which
you and your p e o p l e a r e p a r t i c u l a r l y i n t e r e s t e d .
( 1 ) - The law does n o t p e r m i t F e d e r a l r e s e r v e banks to compete
f o r b u s i n e s s w i t h each o t h e r or w i t h the n a t i o n a l banks, s t a t e banks and
t r u s t companies of the c o u n t r y . They a r e n o t allowed to r e c e i v e d e p o s i t s
from the p u b l i c nor a r e they p e r m i t t e d to make l o a n s or advances d i r e c t
to i n d i v i d u a l s , f i r m s o r c o r p o r a t i o n s . In th@r r e d i s c o u n t o p e r a t i o n s they
a r e l i m i t e d to n o t e s and b i l l s d e f i n e d as " e l i g i b l e " which b e a r the e n d o r s e ment of a member bank.',,: I t f o l l o w s , t h e r e f o r e , t h a t F e d e r a l r e s e r v e banks
cannot extend any d i s c o u n t accommodations t o the p u b l i c e x c e p t through the
medium of a member bank, w i t h which i n s t i t u t i o n s the l o a n s mast f i r s t be
n e g o t i a t e d . F e d e r a l r e s e r v e banks have no f u n d s t o l e n d the p u b l i c through
the i n s t r u m e n t a l i t y of member banks a c t i n g a s b r o k e r s . A F e d e r a l r e s e r v e
bank does n o t t a k e the i n i t i a t i v e i n making l o a n s t o a member bank f o r the
purpose of e n a b l i n g the member bank to d i s t r i b u t e the f u n d s so advanced to
i t s customers. The Federal r e s e r v e bank l e n d s to the member "bank a g a i n s t
t r a n s a c t i o n s a l r e a d y made f o r the puroose of e n a b l i n g the member bank to
r e s t o r e i t s r e s e r v e to the l e g a l r e q u i r e m e n t , a f t e r t h e r e s e r v e h a s been
impaired or i s about to be impaired because of i n c r e a s e d l o a n s and d e p o s i t s .
(2)
- I have a l r e a d y c a l l e d your a t t e n t i o n t o the f a c t t h a t the
F e d e r a l r e s e r v e bank i s given no c o n t r o l over the p o l i c y of i t s member banks
w i t h r e s p e c t t o l o a n s b u t t h a t i t cannot compel a member bank to make a l o a n
which i t does n o t d e s i r e to nake n o r p r e v e n t i t from making one which i t
wishes to make. N e i t h e r can a F e d e r a l r e s e r v e bank c o n t r o l the r a t e of
i n t e r e s t charged by member b a n k s . In c a s e of i s t a t e banks the i n t e r e s t r a t e
i s r e g u l a t e d by the laws of the r e s p e c t i v e s t a t e s and i n the case of n a t i o n a l
banks the F e d e r a l law p e r m i t s those i n s t i t u t i o n s to charge up to the maximum
r a t e s p e r m i t t e d i n the s t a t e s i n which they a r e l o c a t e d .
(3)
- No F e d e r a l r e s e r v e hank can r e d i s c o u n t p a p e r f o r member
banks o u t s i d e of i t s own F e d e r a l Reserve D i s t r i c t . I t s r e d i s c o u n t t r a n s a c t i o n s a r e l i m i t e d t o d e a l i n g s w i t h i t s own member banks. The F e d e r a l Reserve
Act does n o t r e q u i r e r a t e s of d i s c o u n t to be u n i f o r m i n a l l d i s t r i c t s . Each
F e d e r a l r e s e r v e bank i s a u t h o r i z e d by p a r a g r a p h ( d ) of S e c t i o n lU of the
X-32l7a
F e d e r a l Reserve Act " t o e s t a b l i s h from time to t i m e , s u b j e c t t o r e v i e w
and d e t e r m i n a t i o n of the F e d e r a l Reserve Board, r a t e s of d i s c o u n t to be
charged by the F e d e r a l r e s e r v e bank f o r each c l a s s of p a p e r , which s h a l l
be f i x e d w i t h a view of accommodating commerce and b u s i n e s s and which,
s u b j e c t t o t h e a p p r o v a l , review and d e t e r m i n a t i o n of the F e d e r a l Reserve
Board, may be graduated or p r o g r e s s e d on the b a s i s of t h e amount of the
advance# and d i s c o u n t accommodations extended by t h e F e d e r a l r e s e r v e bank
to the borrowing bank". The l a s t sentence of t h e p a r a g r a p h ouoted above
r e l a t e s t o what i s k n o m a s the " p r o g r e s s i v e r a t e " , which h a s now been
a b o l i s h e d i n t h e . f o u r Federal Reserve D i s t r i c t s i n which i t was f o r m e r l y
effective.
One of t h e e a r l y d r a f t s of the F e d e r a l Reserve B i l l which was cons i d e r e d by Congress i n 1913 provided t h a t the F e d e r a l Reserve Board should
each week f i x the r a t e s of d i s c o u n t to be charged by the r e s p e c t i v e Fede r a l r e s e r v e banks and t h a t i t should n o t i f y each F e d e r a l r e s e r v e bank what
i t s d i s c o u n t r a t e s would be f o r the ensuing week. This p r o v i s i o n was
s t r i c k e n out i n a l a t e r d r a f t of the b i l l and the Act as . f i n a l l y p a s s e d
c o n t a i n s the language above m o t e d . I t seems, t h e r e f o r e , to be the i n t e n t
of Congress t h a t the d i s c o u n t r a t e s s h a l l n o t o r d i n a r i l y be i n i t i a t e d by
the F e d e r a l Reserve Board b u t by the d i r e c t o r s of the r e s p e c t i v e F e d e r a l
r e s e r v e banks. This i s c o n s i s t e n t with the theory of t h e Act which does
n o t c r e a t e a c e n t r a l bank b u t a r e g i o n a l ..banking system, comprised of
twelve independent u n i t s . This theory i s based upon the presumption t h a t
the d i r e c t o r s of a F e d e r a l r e s e r v e bank a r e more c o n v e r s a n t w i t h c r e d i t
c o n d i t i o n s and c u r r e n t r a t e s f o r money i n t h e i r r e s p e c t i v e d i s t r i c t s than
the F e d e r a l Reserve Board in " a s h i n g t o n can be expected to b e . , ? ! hile the
F e d e r a l Reserve Board undoubtedly h a s power to d i r e c t any F e d e r a l r e s e r v e
bank which p e r s i s t s i n m a i n t a i n i n g a d i s c o u n t r a t e which i s c l e a r l y n o t
w a r r a n t e d by g e n e r a l c o n d i t i o n s to change t h a t r a t e , the Board so f a r has
had no o c c a s i o n t o i n i t i a t e a r a t e f o r any F e d e r a l r e s e r v e bank.
In c o n s i d e r i n g the p r o p e r l e v e l of d i s c o u n t r a t e s , t h e d i r e c t o r s of
the F e d e r a l r e s e r v e banks have taken i n t o c o n s i d e r a t i o n n o t only the
r e s e r v e p o s i t i o n of t h e bank b u t a l s o c u r r e n t l o c a l r a t e s f o r money. I t irs
the purpose of t h e F e d e r a l r e s e r v e b=nks to a f f o r d a ready means of r e d i s c o u n t i n g p a p e r f o r member banks b u t i f a r t i f i c i a l l y low r a t e s should be
e s t a b l i s h e d the r e s u l t would p r o b a b l y be an u n h e a l t h y s t i m u l a t i o n of l o a n s
by member banks, which, I u n d e r s t a n d from your l e t t e r of September 1 2 t h , i s
something t h a t you do n o t d e s i r e , f o r you say in t h a t l e t t e r "Nor -ould I
have you b e l i e v e f o r a moment t h a t I would have t h e F e d e r a l Reserve Bank
System encourage an e x t e n s i o n of c r e d i t t h a t would r e s u l t i n unwise i n f l a t i o n o r s p e c u l a t i o n " . The Board i s e n t i r e l y i n accord " i t h your d e s i r e to
1033
-3-
X-3217a
see t h e F e d e r a l Reserve System o p e r a t e as an agency f o r f i n a n c i a l r e l i e f
a t a time when i t i s most u r g e n t l y needed, and i n o r d e r to k e e p t h e F e d e r a l
r e s e r v e banks i n p o s i t i o n to extend such r e l i e f i t i s n e c e s s a r y t h a t a
p o l i c y he adopted which w i l l n o t encourage an undue expansion of l o a n s made
f o r the sake of t h e p r o f i t t o be d e r i v e d by r e d i s c o u n t i n g w i t h the F e d e r a l
r e s e r v e bank.
I n your l e t t e r of the 22nd i n s t a n t you say t h a t you a r e a l t o g e t h e r
convinced t h a t t h e F e d e r a l Reserve System i s n o t f u n c t i o n i n g a s i t should
i n y o u r d i s t r i c t . You say t h a t you a r e informed t h a t the banks i n your
d i s t r i c t a r e n o t g e n e r a l l y p a t r o n i z i n g the F e d e r a l Reserve System. I t
i s t r u e t h a t a l a r g e m a j o r i t y of s t a t e banks, f o r r e a s o n s s a t i s f a c t o r y
t o themselves, have n o t deemed i t a d v i s a b l e t o apply f o r membership i n
the F e d e r a l Reserve System and t h e r e are a l s o a c o n s i d e r a b l e number of
taember banks which have had no o c c a s i o n u p t o t h i s time t o r e d i s c o u n t
w i t h the F e d e r a l r e s e r v e bank. Many of the non-member s t a t e b a n k s ,
however, have borrowed money from t h e i r c o r r e s p o n d e n t s i n Omaha, Kansas
City and o t h e r c i t i e s and t h e s e banks i n t u r n have r e d i s c o u n t e d w i t h the
F e d e r a l r e s e r v e b a n k s . Nor i s i t to be doubted t h a t the member banks
which have n o t r e d i s c o u n t e d w i t h t h e F e d e r a l r e s e r v e bank would h e s i t a t e
t o do so should occasion a r i s e .
x
On August 31, 1921 t h e r e were 203 member banks in Nebraska. At t h a t
time 7*4- of t h e s e banks were not borrowing from t h e F e d e r a l Reserve Bank.
129 Nebraska member banks were a t t h a t time r e d i s c o u n t i n g t o the e x t e n t
of $11,263,3^5. On June 3 , 1920, 135 Nebraska banks were borrowing from
the F e d e r a l Reserve Bank $30,068,992 and on October 3 0 , 1920, 168 Nebraska
members were borrowing $38,294,175. When i t i s remembered t h a t the t o t a l
r e d i s c o u n t s and b i l l s payable of a l l n a t i o n a l banks i n t h e U n i t e d S t a t e s ,
a s shown by the o f f i c i a l r e p o r t of the C o m p t r o l l e r of the Currency, OB
August 22, 1907 amounted t o $59,177,000, itwwould seem t h a t t h e advances
l a s t October of over $38,000,000 by the Kansas C i t y bank to member banks
i n Nebraska alone would i n d i c a t e v e r y e f f e c t i v e f u n c t i o n i n g on t h e p a r t
of t h a t bank. You w i l l r r e c a l l the s e v e r e "oanic which o c c u r r e d i n the
1CC4
-4-
X-32i?a
f a l l of 1907, and f o r s e v e r a l weeks# b e f o r e t h e p a n i c develcoed
c r e d i t c o n d i t i o n s were as s t r i n g e n t a s they have e v e r been i n t h i s
country.
I t i s t r u e t h a t the l o a n s of t h e F e d e r a l Reserve Bank of Kansas
City to member banks i n Nebraska a r e now o n l y about e l e v e n and a
m i a r t e r m i l l i o n d o l l a r s a s a g a i n s t t h i r t y - e i g h t and a q u a r t e r m i l l i o n s
l a s t October, b u t i t does n o t f o l l o w n e c e s s a r i l y t h a t t h i s h a s been
the r e s u l t of h a r s h demands f o r l i q u i d a t i o n on the p a r t of the F e d e r a l
Reserve Bank of Kansas C i t y . I{s i t n o t p o s s i b l e t h a t t h e r e h a s been
a g r e a t d e a l of v o l u n t a r y l i q u i d a t i o n , made p o s s i b l e by s a l e s of f&rm
p r o d u c t s o r by i n c r e a s e d d e p o s i t s ? C e r t a i n l y c r e d i t c o n d i t i o n s g e n e r a l l y
a-re by no means a s s t r i n g e n t now-as they were l a s t October. While i t
may be t r u e t h a t the F e d e r a l Reserve Bank of Kansas C i t y , m i n d f u l of
i t s r e s p o n s i b i l i t y u n d e r the law and a c t i n g in accordance w i t h the d i c t a t e s of o r d i n a r y b a n k i n g prudence, may have had o c c a s i o n a t times to
c a l l the a t t e n t i o n of some of t h e l a r g e r borrowing banks t o the n e c e s s i t y of working themselves i n t o a s t r o n g e r p o s i t i o n , the F e d e r a l Reserve
Board h a s y e t to be shown t h a t t h e F e d e r a l Reserve Bank h a s e v e r u n d e r t a k e n t o say t o a member bank what p a r t i c u l a r l o a n s i t should r e q u i r e
to be p a i d o r ask t o have r e d u c e d .
At zqy r e q u e s t the B o a r d ' s D i v i s i o n of R e p o r t s and S t a t i s t i c s h a s
p r e p a r e d Wo t a b l e s which r e l a t e to the d i s c o u n t t r a n s a c t i o n s by the
Omaha Branch of the F e d e r a l Reserve Bank of Kansas City d u r i n g October,
1920 and Augtist, 1921. One t a b l e shows the t o t a l amount of b i l l s
d i s c o u n t e d f o r member banks d u r i n g t h e s e months, t h e r a t e of i n t e r e s t
charged the borrowing customers by the r e d i s c o u n t i n g member b a n k s ,
the amount a t each r a t e and the p e r c e n t a g e of p a p e r taken a t each r a t e
t o the t o t a l amount. You w i l l u n d e r s t a n d , of c o u r s e , t h a t t h i s r e l a t e s
only to the r a t e s of i n t e r e s t charged by member banks on the p a r t i c u l a r n o t e s which they i n t u r n r e d i s c o u n t e d with the F e d e r a l Reserve
Bank Branch a t Omaha. I haves no i n f o r m a t i o n as to the r a t e s charged
by the n? ember banks on t h e i r e n t i r e volume of l o a n s to c u s t o m e r s . The
o t h e r t a b l e shows t h e number of s e p a r a t e n o t e s or p i e c e s of t>aper d i s counted by the Omaha Branch d u r i n g the same months and the r a t e charged
customersaby the borrowing bank i n each c a s e .
-5-
X-3217a
TABLE A
BILLS DISCOUNTED FOR MEMBER BANKS BY THE
OMAH4 BRANCH OF THE KANSAS CITY FEDERAL RESERVE BANK
DURING OCTOBER i g 2 0 AND AUGUST 1921
Amount of p a p e r d i s c o u n t e d :
Member b a n k s ' c o l l a t e r a l n o t e s :
Customers' b i l l s and n o t e s : TOTAL -
October 1420
August 1421
$16,058,636
16.800.179
$32,858,865
$6,562,655
7.108.201
$13,870,868
442
1,647
4,089
255
J331,988
179
145
7-lOfr
6.0#
Number of p i e c e s of paper d i s c o u n t e d :
Member b a n k s ' c o l l a t e r a l n o t e s : Customers' b i l l s and n o t e s : TOTAL Number of member banks accommodated:
Average r a t e of d i s c o u n t charged member
banks by Omaha Branch -
Amount of p a p e r d i s c o u n t e d by Omaha Branch
on which d i s c o u n t i n g member banks
charged t h e i r customers a r a t e o f : August 1421
October IQ20
Per c e n t
Per cent
Amount
of t o t a l Amount
of t o t a l
5i
6
6f
6f
7
7i
8
85
8f
9
-
Si -
10
12
-
$
19,700
150,200
85,000
6,100
1,825, 800
2,576,600
9,154,100
30,000
528,200
1,077,500
130,300
1,192,900
21. 800
$16,800,200
.12 $
.89
546,100
• 51
.04
1,650,100
10.87
1,977,400
15.34
1,870,400
54.49
— —
.13
400
3.14
6.41
460,900
— —
.77
796, 300
7,10
6.100
,14.
1 00.00# $ 7 , 3 0 8 , 2 0 0
—
—
—
-»
—
-
—
-
-
7.47
— -
22.58
27. C6
25.59
-
-
.01
6.31
-
-
10.90
.03
lOO.OCfib
1CGG
X-3217a
TABLE B
NUMBER OF PIECSS "OF p/PER DISCOUNT EC BY OM/H/ BRANCH
ON WHICH DISCOUNTING MEMBER BJINKS CEflRGEDTHElR
CUSTOMERS A RATE OF: -
SATE
5i
6
u
October 1Q2Q
Par cent
Number
-Si.
August 1921
Per cent
Number
9t
10
12
3
20
9
l
237
229
2,022
2
111
199
11
800
3
.08
.55
.25
,.C3
b.50
6.28
55.44
.05
3.04
5.46
.30
21.94
.08
913
11
52.6b
.64
Total
3,64?
100.00
1,733
100.00
7
7i
g
84
84
9
—
mm-
26
1.50
—
67
95
46 s
mm
mm
1
152
-»
3.67
5- 48
27.00
mm
. Ob
6.77
—
I t should be borne i n mind t h a t due t o t h e o p e r a t i o n of the
p r o g r e s s i v e r a t e l a s t October t h e average r a t e of d i s c o u n t which t h e
borrowing member banks paid t h e Omaha Branch d u r i n g t h a t month was
7-10%, while i n August 1921, t h e p r o g r e s s i v e r a t e h a v i n g been
a b o l i s h e d , t h e discount r a t e p a i d i n a l l cases was 6$.
I t i s i n t e r e s t i n g t o note the changes i n t h e p e r c e n t a g e s of
r e d i s c o u n t e d paper which had been taken a t varying r a t e s of i n t e r e s t
by t h e borrowing member banks. In October 1920 the p e r c e n t a g e of
V> paper discounted by t h e member banks was 10.87 a g a i n s t 22.38 i n
August 1921. The percentage of
paper was 15.34 a g a i n s t 27.c6
and the p e r c e n t a g e of 8% paper was 54.49 a g a i n s t 25.59. The p e r centage of 9% paper was 6 . 4 1 a g a i n s t 6 . 3 1 . The percentage of
10/6 p a p e r , which was ~1,1Q i n October l/>20# i n c r e a s e d , however, t o
10,90 p e r c e n t i n August 1921. Looking at Table "B", which r e l a t e s
to t h e number of p i e c e s of paper d i s c o u n t e d , you w i l l see t h a t i n
October 1920 t h e p e r c e n t a g e of r e d i s c o u n t e d paper t a k e n by the '
member banks a t 8$ was 55*44 a g a i n s t 27.00 i n August 1921, 9%. 5.45
a g a i n s t 8.77 and 10$ paper 21.94 a g a i n s t $2.68.
A A 'S>*V»
-7-
X-32l7a
C a r r y i n g t h e a n a l y s i s f u r t h e r wa w i l l see t h a t of t h e
t o t a l of $7/306,200 which was r e d i s c o u n t e d by t h e Omaha Branch
f o r Nebraska member banks d u r i n g August 1$21, only $79^*800 was
t a k e n by t h e borrowing banks from t h e i r customers a t a 10$ r a t e ,
but t h i s amount was made up of 9^3 s e p a r a t e p i e c e s of p a p e r , more
t h a n o n e - h a l f of t h e t o t a l number of n o t e s t a k e n d u r i n g t h e
month. The average amount of t h e r e d i s c o u n t e d n o t e s on which
customers had been charged 10$ was i n October 1$20 about $1,490
and i n August 1921 about $870. The average amount of t h e r e d i s c o u n t e d n o t e s on which Customers had b e e n charged 8% was i n
October 1920 about $4,520 and i n August l g 2 1 about $4,000, and
t h e a v e r a g e of 7% n o t e s was i n October 1920 about $7#700 and i n
August 1921 about $24,62$.
A l l t h i s would i n d i c a t e , a t l e a s t so f a r a s t h e r e d i s c o u n t e d
n o t e s a r e concerned, t h a t t h e l a r g e r borrowers a r e g e t t i n g a
s l i g h t r e d u c t i o n i n r a t e but t h e r e i s n o t h i n g t o show t h a t t h e
s m a l l e r borrowers a r e , f o r n o t w i t h s t a n d i n g t h e reduced volume
of l o a n s t h e number of t r a n s a c t i o n s at3.0^ was g r e a t e r i n August
1921 t h a n i n October 1920,
There i s n o t h i n g i n t h i s l e t t e r or i n my l e t t e r of September
15th which i s i n t e n d e d a s a r e f l e c t i o n upon or a c r i t i c i s m of t h e
banks of Nebraska. I n common w i t h t h e r e s t of t h e banks of t h e
c o u n t r y , t h e y have had v e r y s e r i o u s problems t o contend w i t h and they
a r e E n t i t l e d t o g r e a t c r e d i t f o r t h e manner i n which they have met
t h e s t r a i n which has been imposed upon them, but I wish t o c a l l
your a t t e n t i o n t o t h e f a c t t h a t t h e F e d e r a l Reserve Bank, of Kansas
C i t y , l i k e a l l o t h e r banks has had i t s problems too and i t s r e d i s count f a c i l i t i e s have c e r t a i n l y been of g r e a t a s s i s t a n c e t o t h e
banking community and through t h e banks t o t h e p u b l i c . The Federal
Reserve Board i s watching t h e r a t e s i t u a t i o n c l o s e l y and i s anxious
t o have t h e r a t e s of each Federal r e s e r v e bank bear t h e p r o p e r
relationship to current rates i n the respective d i s t r i c t s .
I i n q u i r e d i n my p r e v i o u s l e t t e r whether you thought a r e d u c t i o n i n t h e d i s c o u n t r a t e of t h e Federal Reserve Bank of Kansas
City would r e s u l t i n a lower l e v e l of i n t e r e s t r a t e s t o t h e p u b l i c ,
I see n o t h i n g , however, i n your l e t t e r of September 22nd which b e a r s
on t h i s i n q u i r y and I w i l l now withdraw t h a t q u e s t i o n and ask i n s t e a d
whether you t h i n k c o n d i t i o n s i n your S t a t e w i l l be improved by a
r e d u c t i o n i n t h e Federal Reserve Bank r a t e and I would a p p r e c i a t e
a f r a n k e x p r e s s i o n of your v i e w s .
I am informed by t h e Governor of t h e Federal Reserve Bank of
Kansas City t h a t t n e r e c o r d s of t h e Omaha Branch w i l l show t h a t no
member bank has been urged t o l i q u i d a t e r a p i d l y i t s d i s c o u n t l i n e
and t h a t n e i t h e r t h e head o f f i c e nor the Branch h a s e v e r suggested
t o a member bank what p o l i c y i t should adopt towards r e q u i r i n g i t s
customers t o l i q u i d a t e . Between October 30, 1920 and June 30, 1921
t h e member banks i n Nebraska have reduced t h e i r l o a n s from t h e
Federal Reserve Bank by about $25,000,000 but of t h i s amount
- 1038
-8-
X-32172
X-3217a
approximately $1g,000,000 was l i q u i d a t e d by banks i n Omaha and
Lincoln, while t h e l o a n s of a l l o t h e r member banks i n Nebraska were
reduced only by about $b,jOO,OOG.
Whatever impressions may e x i s t t o t h e c o n t r a r y , i t i s a
f a c t t h a t t h e Federal Reserve Board h a s always been keenly d e s i r o u s
t o have Federal r e s e r v e banks do a l l they could l e g i t i m a t e l y t o a i d
t h e member banks i n meeting t h e c r e d i t requirements of t n o s e engaged
i n a g r i c u l t u r e and t h e r a i s i n g of l i v e s t o c k . The t r o u b l e , however,
l i e s l a r g e l y i n t h e f a c t t h a t the l a r g e r o p e r a t i o n s i n farming and
c a t t l e r a i s i n g are c a r r i e d on i n s e c t i o n s where the d e p o s i t s a r e
seasonal and where the l e n d i n g a b i l i t y of the banks out of t h e i r
own r e s o u r c e s i s l i m i t e d . Tnen again, many banks do not l i k e t o
lend t h e i r money f o r a s l o n g a term as i t i s needed i n c a t t l e
r a i s i n g and i n c e r t a i n farming o p e r a t i o n s
The J o i n t Commission of Congress of A g r i c u l t u r a l Inquiry
has been f o r some months p a s t i n v e s t i g a t i n g thoroughly t h e c r e d i t
s i t u a t i o n a s r e l a t e d t o t h e farming and l i v e stock i n d u s t r i e s and
I am informed t h a t i t s r e p o r t w i l l be made p u b l i c b e f o r e very l o n g .
I am s u r e i t w i l l be most i n t e r e s t i n g and i l l u m i n a t i n g and w i l l no
doubt c o n t a i n some c o n s t r u c t i v e s u g g e s t i o n s .
I am s e n d i n g you with t h i s l e t t e r a copy of B u l l e t i n No.
999, e n t i t l e d " P r i c e s of Fara Products i n t h e United S t a t e s " ,
r e c e n t l y i s s u e d by t h e Department of A g r i c u l t u r e , which c o n t a i n s a
&reat d e a l of i n f o r m a t i o n of v i t a l i n t e r e s t to farmers and t o a l l
who l i v e i n a g r i c u l t u r a l s t a t e s .
I wish i n conclusion t o thank you f o r t h e l e t t e r s you have
w r i t t e n me and t o say t h a t I have r e p l i e d to them i n no c o n t r o v e r s i a l
s p i r i t whatever. I am sure t h a t we have a common purpose and I hope
t h a t you w i l l have an o p p o r t u n i t y sometime of t a l k i n g with tne o f f i c e r s
and d i r e c t o r s of the Federal Reserve Bank of Kansas City, who a r e
more d i r e c t l y r e s p o n s i b l e f o r t h e p o l i c i e s and o p e r a t i o n s of the
Federal Reserve Bank t h a n t h e Federal Reserve Board i s . I t i s d i f f i c u l t
f o r t h e Board t o admonish t h e o f f i c e r s and d i r e c t o r s of a Federal r e s e r v e
bank a s t o t h e i r proper p o l i c i e s and conduct as l o n g a s complaints a r e
merely general i n t h e i r n a t u r e . I t i s t h e e a r n e s t d e s i r e of t h e Federal
Reserve Board t h a t a l l Federal r e s e r v e banks should f u n c t i o n a s they
a r e intended by law and if you w i l l l e t me know j u s t i n what r e s p e c t s
t h e Omaha Branch or t h e Federal Reserve Bank of Kansas City i s not
f u n c t i o n i n g p r o p e r l y , t h e i n f o r m a t i o n w i l l be a p p r e c i a t e d .
I have s e n t a copy of t h i s l e t t e r t o t h e Chairman of t h e Board
of d i r e c t o r s of t h e Federal Reserve Bank of Kansas City, w i t h the r e q u e s t
t h a t i t be read t o t h e d i r e c t o r s a t t h e i r next meeting.
Very t r u l y yours,
Hon. Samuel R. McKelvie,
Governor of Nebraska,
Lincoln, Nebraska.
Governor.
1009
STATE OF KEBRASKA
EXECUTIVE OFFICE
LINCOLN
S e p t . 22, 1921;.
X-J217b
Hon. W, P. G.Harding,
Governor, F e d e r a l Reserve Board,
Washington, D.C.
My d e a r Governor H a r d i n g : I am g r e a t l y o b l i g e d t o you f o r t h e i n f o r m a t i o n
contained i n your l e t t e r of September f i f t e e n .
The f a c t s which you s e t out a r e of such v i t a l
importance and suggest o t h e r l e a d s of even equal or g r e a t e r
importance, t h a t I have c a l l e d a c o n f e r e n c e of t h e Council
of t h e Nebraska Bankers' A s s o c i a t i o n and t h e o f f i c i a l s of
c e r t a i n Federal and p r i v a t e f i n a n c i n g a g e n c i e s t o be h e l d
i n Omaha a t 7 : 3 0 P.M., September t w e n t y - s i x . The p u r p o s e
of t h i s c o n f e r e n c e w i l l be t o d i s c u s s t h e s e q u e s t i o n s i n
d e t a i l and t o determine what may be done t o e f f e c t a source
of r e a s o n a b l e c r e d i t t o t h e farmer at a r a t e of i n t e r e s t
t h a t be can a f f o r d t o pay, I have i n v i t e d Governor M i l l e r
of t h e Kansas City F e d e r a l Reserve Bank and Mr.Ramsay,
Chairman of t h e Board of D i r e c t o r s of t h a t bank. I wish
t h a t you might a l s o be p r e s e n t .
The f a c t s t h a t you give r e g a r d i n g t h e r a t e of
i n t e r e s t t h a t i s being charged by correspondent banks on
l o a n s t h a t a r e r e d i s c o u n t e d through t h e F e d e r a l Reserve Bank
are intensely interesting,
I am not p r e p a r e d t o say t h a t
t h e s e margins have g i v e n any unusual p r o f i t t o t h e banks
t h a t have been p a t r o n i z i n g t h e Federal Reserve System, but
I do f e e l t h a t t h e r e i s something r a d i c a l l y wrong w i t h a
system which r e q u i r e s such wide m a r g i n s . Alsc, I am
convinced t h a t t h i s and o t h e r hampering i n f l u e n c e s must be
remedied b e f o r e t h e system w i l l be v e r y u s e f u l t o a g r i c u l t u r a l borrowers h e r e .
I am f u r t h e r informed t h a t t h e banks i n t h i s
d i s t r i c t a r e not g e n e r a l l y p a t r o n i z i n g t h e F e d e r a l Reserve
System. I t would seem t h a t if the margins i n d i c a t e d i n
your l e t t e r a r e p r o f i t a b l e t o t h e c o r r e s p o n d e n t banks,
t h e r e would be a more g e n e r a l p a t r o n a g e of t h e F e d e r a l
P/3 serve Bank. Tne answer t o t h i s seems t o be i n d i c a t e d
i n a t e l e g r a m t h a t I have j u s t r e c e i v e d from a member bank a t
Genoa, Nebraska, as f o l l o w s :
X-J2l7b
-2-
"The Farmers S t a t e Bank j oined t h e
Federal Reserve Bank two y e a r s ego and f o r
t h e p a s t s i x months has r e d i s c o u n t e d 10$
i n t e r e s t - b e a r i n g n o t e s . Cur r e c o r d s j u s t i f y
me i n s a y i n g t h a t we have made no p r o f i t s
owing t o t h e i r changes of r u l e s and r e d i s c o u n t
rates.11
I am a l s o informed t h a t c e r t a i n banks i n t h i s
t e r r i t o r y have, w i t h i n t h e l a s t s i x t y days, withdrawn
from membership i n the Federal Reserve system.
From i n f o r m a t i o n t h a t I have, I a m • a l t o g e t h e r
convinced t h a t t h e Federal Reserve system i s not f u n c t i o n i n g a s i t should i n t h i s d i s t r i c t . The demands f o r
l i q u i d a t i o n were h a r s h i n t h e extreme, i n view of t h e
f a c t t h a t t h i s i s an a g r i c u l t u r a l r e g i o n and t h e borrowers
h e r e could not e a s i l y conform t o t h e same r e q u i r e m e n t s
t h a t were imposed upon s e m i - a g r i c u l t u r a l or n o n - a g r i c u l tural regions.
In c o n c l u s i o n I d e s i r e t o suggest t h e d e s i r a b i l i t y
of a c l o s e c o o p e r a t i o n among a l l of t h e a g e n c i e s t h a t have
a c o n t r o l i n g i n f l u e n c e over t h e h a n d l i n g of Federal Reserve
f u n d s i n t h i s d i s t r i c t . This i s not t h e c o n d i t i o n t h a t
o b t a i n s now, and I am s i n c e r e l y h o p e f u l t h a t something w i l l
be done t o b r i n g i t about. May I a n t i c i p a t e your h e a r t y
interest in that direction?
Very t r u l y y o u r s ,
Samuel B. McKelvie
Governor.
@FedFRASER